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Friday, April 24, 2009

Black holes

It always takes a few days to take stock of a budget and get a feel for how it is going to play out in the country and for the economy itself. Many of the papers are spouting nonsense about the new 50% tax rate today, largely because it is their proprietors who will have to pay extra. However, the big controversy has to be over the accuracy of the Chancellor's forecasts. Are we in a bigger mess than he has said?

Today's Guardian certainly thinks so. They quote a report by The Institute for Fiscal Studies which warns that even big spending cuts in health and schools may not be enough to fill the structural deficit in the nation's finances:

Robert Chote, the institute's director, said that by 2017-18 the loss through tax increases and cuts in public spending would be equivalent to £2,840 a year for every family in the country - only half of which has been accounted for by the government.

The IFS calculated that there is a £45bn black hole in the finances, requiring further tax rises of £1,430 per family, or massive spending cuts.

They continue:

The chancellor avoided mention of spending cuts in his budget speech, concentrating on a 0.7% a year increase in spending from 2011, which excludes investment in key areas such as schools and hospitals. But the IFS pointed to the 17% annual cuts in investment spending from 2011-12 which will see it halve in three years, concluding that this will mean total spending will fall by 0.1% a year over that period.

Once the effect of the 8% annual growth in debt interest payments and rising spending on unemployment benefit are stripped out, spending across government departments will have to fall by an average of 2.3% a year in real terms, said IFS economist Gemma Tetlow. Cuts of this order were last seen in the 70s.

She added that with the government pledged to continue increasing spending on overseas aid, it was likely that all other departments would face spending cuts. "Health, education, law and order would all experience real cuts."

Chote said it looked likely that the bulk of the savings required over the coming eight years would mainly come from spending cuts rather than new taxes.

Of course now we are getting into the realm of Barnetised expenditure, that is those areas of government spending which Wales and Scotland get a share of. The impact on devolved services could be devastating. Labour's black hole could well turn out to be an abyss as far as the Welsh Assembly is concerned.
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