Between A Rock And A Hard Place

24th September 09 – Between a rock and a hard place

The optimism of recent times could not last, at least not in terms of the balance sheet of UK Ltd. The total tax take in the five months of this fiscal year to the end of August 09 was 11.4% down on the equivalent period last year (the rock). Government spend on social benefits was 9.5% higher (the hard place). What are the consequences of this two-way stretch? In a word: debt.

The UK’s government borrowing is two and a half times higher that at the same point last year due to a record £16.1bn borrowed in the month of August 09. For perspective, this sum represented an increase of 63% on August 08 and it was the largest August deficit since records began in 1993. The UK has borrowed £65.3bn since the start of the financial year in April 09 compared with £26.1bn in the comparator. How would you feel if your personal borrowings mirrored these percentages? Try to feel it for the nation, your children will.

John Hawsworth, head of macro economics at PricewaterhouseCoopers, said “The figures confirm the dire state of the public finances. It seems likely budget deficits will overshoot Treasury forecasts not only in 2009/10 but for some years to come, resulting in pressure to tighten fiscal policy by more in the medium term than the Treasury’s Budget plans suggested.” He estimated that Government borrowing could reach as much as £200bn in the full fiscal year. Jonathan Loynes at Capital Economics went further by thinking that there would be an overshoot in the Treasury estimate of £50bn to reach a staggering sum of £225bn.

That the Bank of England is on the other end of this borrowing by printing cash to gobble up the gild-edged securities issued to effect the borrowing is hard to fathom since broad money supply in August 09 grew by just 0.1%.

A rock, a hard place and a dollop of QE. Quite a witch’s brew.