Doubts over whether pre-budget measures will prevent recession

November 24, 2008

Roger Bootle is economic adviser to Deloitte. The views expressed are his own.

The Chancellor was right to try to give some help to the economy but, while the scale of the increase in future borrowing is huge, the economic effect of the reduction in VAT will be tiny.

The size of the PBR package, about £9 billion this year, rising to £16bn next year, was roughly equal to what had been mooted in the media. But the scale of the measures, although they sound large, is in fact small.

They amount to only about 1% of GDP next year. The Treasury itself has estimated that this will reduce the extent of the downturn in the economy by just half a percentage point, not enough to prevent a severe recession. roger-bootle

What’s more, there must be doubts over whether they will have even that effect. As expected, the centre-piece was a temporary reduction in VAT from 17.5% to 15%. But while this measure will put money in consumers’ pockets in time for Christmas, it is not clear what impact this will have on spending or overall economic growth.

This is partly because the cut in VAT will not be fully passed on and that bit which is will be partly saved.
Although the borrowing numbers reach 8% of GDP, roughly equal to what they reached in the mid 1970s and early 1990s recessions, this is predicated on the assumption that by 2010 the economy is recovering again.

We suspect, by contrast, that it will still be contracting. Accordingly, the borrowing numbers could easily end up much higher.

The key to the economic environment is going to be the behaviour of the banks. The Chancellor may well have to take more effective control of them to ensure that they carry on lending.


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Why they don’t tell the truth? the problem is too deep and it have been for a long time, long before the lebore.
The banks are the problem, most of it greed, sure people know one day it will blow. Well the US started it, but the UK follow it, without question, even most of them know it is risky, but who care, they only thought about their bonuses and after all they don’t live forever. Greed is the problem and how to stop that, it’s harder then anything you can think off…

Posted by manny | Report as abusive

I think the government is absolutely right to stimulate the economy although i dont believe they expect this package to prevent a recession it is designed to reduce the severity of it.
I believe there were many good measures which will help, however, the centrepiece of this package, the 2.5% vat reduction will have very little impact. There is little point in reducing prices of vat rated goods if the public have no money to spend. A better approach may have been to reduce the basic tax rate in order to put money into working peoples pockets and provide a one off benefit payment to those who do not pay tax.
Howvere the conservatives policy of waiting and watching would have been a disastrous alternative which would leave this country crippled for many years to come.

Posted by Steve Croucher | Report as abusive