What Government Borrowing means for you

In his 2009 Budget Alistaire Darling gave us all a glimpse into the future and the future is not bright.

New Tax Rates from 2012 or soon after
No matter which Party is elected next year, by 2012 or soon after you can expect something like the following

1  Basic Rate Tax at 30% or more

2  A High Rate Tax Band of 50% at around £60,000 a year.

3 VAT at 20% or more

How does one justify that forecast?

Darling announced Government borrowing of £700Bn over 5 years bringing the total to £1,400Bn. These are enormous numbers but what they mean for the economy is even more worrying.

Interest on the existing debt costs about £30Bn and given the shear volume of issuance the government is likely to have to pay at least another £35Bn of annual interest on the new debt.

These figures need to be put in context.

The NHS budget this year is around £100Bn but that is only for England. Based on a UK population of 60Mn of which 50Mn live in England, the figure for the UK as a whole must be around £120-125Bn.

This new debt would therefore fund the NHS for six years. If the NHS made efficiency savings of 20% it would not even pay the interest on the increase in the National Debt.

Looking at it another way, according to the Treasury Red Book, Income Tax raised £140Bn last year. I have read elsewhere that one penny on the basic rate of Income Tax is worth £3Bn to the Treasury. The Red book suggests that the figure is higher at maybe 4Bn if not slightly more.

Taking a simple view raising the Basic Rate of Income tax to 30% would raise about £40Bn and would at least pay the interest.

In practice higher tax rates mean that people have less money to spend and therefore pay less VAT. Lower expenditure also means that there are fewer jobs causing a reduction in income tax receipts and higher Social security expenditure.

Raising the basic rate to 30% would therefore only pay the interest on the new debt and not pay any of it off. In any event there will be a political price to pay. Such a hike in basic rate would almost inevitably mean introducing a 50% tax rate on incomes over say £60,000 a year. The government will probably need to the money anyway.

If yet more money is needed VAT raises £80Bn a year. Raising the rate by 2½% to 20% would bring in £10Bn a year and it might even make a tiny contribution to paying off a very small amount of the £700Bn of new debt.

This is not a party political statement. Whichever party is in power will have to service the debt somehow, and that means increases to those taxes which raise serious amounts of money.

In 2007-8 these taxes were Income Tax at £147Bn, National Insurance £100Bn, and VAT at £80Bn. Even Corporation Tax only raised £47Bn.

This is not a party political statement. Whichever party is in power will have to service the debt somehow and that means increases to those taxes which raise serious amounts of money. These were on 2007-8 figures Income Tax at £147Bn, National Insurance £100Bn, and VAT at £80Bn. Even  Corporation Tax only raised £47Bn.

We are are at the limits of what is politically possible. We arer in for a period of austerity hopefully it will be austerity like after World War II but is could be depression like the 1930s. What is clear is that even if Government spending can restart economic growth paying for that spending will slow the recovery.

As a final note on this the ultimte cost of rescuing the banks in unknown. The government is estimating £50Bn.  The IMF has estimated £100Bn. An economist as the LSE has estimated £450Bn. To put that uncertainty into context it is the governments toatal income tax receiptsd for either 4 months, 8 months or 3 years depending on who is right.

April 2009