In the budget this week, Alistair Darling is expected to revise his prediction for the drop in GDP in 2009 from -1.2% to -3.4%. This sustains the Brown/Darling record of appalling predictions.
The CBI think it will be worse, at -3.9%. I think it will be yet worse, at -4.1%.
I spent Sunday with friends at the LSE dusting off my economic modelling skills. I should state the obvious, that the LSE is in no way associated with my predictions (though if they turn out wrong I reserve the right to blame their modelling!) It is also fair to say they found some of my methodology unorthodox, particuarly the need for a steady intake of Margaux to fuel the input assumptions.
I project GDP will fall by -4.1% in 2009 and by -1.8% in 2010. The Treasury is leaking -0.1% as their 2010 projection. Given the financial services sector is in shock and manufacturing output down by over 18% in the first quarter of 2009 year on year, I can only presume they are relying on massive expansion in the capuccino and dry cleaning industries.
I have assumed that Darling’s budget this year and next year will be close to fiscal neutrality, with a nod towards belt tightening. He has absolutely no room for fiscal stimulus and with an election in the next 15 months he can’t be too sensible.
But the fiscal position looks awful. I project a budget deficit of a massive 12.4% of GDP in 2009 rising to 13.3% in 2010. By 2011 our national debt will reach 1980s Italian proportions of 118% of GDP. Compare that to the 40% guideline for membership of the Euro.
That prospect will spark a collapse in the pound before mid-2010 leading to escalating interest rates, forced on the Bank of England as the government struggles to raise more money because the pound is such a bad bet. That will undoubtedly mean they will have to go cap in hand to the IMF within the next 18 months, but still will not be able to avoid those higher interest rates.
Inflation will come back, reaching 4.5% by April 2010 and shooting upwards after that to 7.1% by end 2010 and entering double digits in 2011. That will put an end to further quantitive easing. House prices still have a further 11% to fall before nominal prices start to increase from July 2010, but will still be falling in real terms. Unemployment will peak in March 2011 at 3.02 million.
The problem Darling faces is that he has no room for fiscal stimulus, because all the funds that may reasonably be raised have been wasted on the bottomless pit of Ponzi banking.
Because of the corner into which Darling has painted himself, and on the basis that New Labour have no stomach for radical restructuring of the economy and measures such as bank nationalisation, the only thing that would truly improve the prospect would be a radical budget rebalancing – perhaps a 2% increase in total tax yield combined with a 5% cut in public spending, over a three year period. That would reduce a raft of linked problems including interest rates, inflation, deficit and debt burden. It would accelerate unemployment and make the recession sharper, but would on my projections give something of a J curve effect.
The other thing that would help might be joining the Euro, if we could beg them on bended knee to accept us as a basket case. But the other European countries would be crazy to take us on.
I realise many people find spending cuts unpalatable. But we are in a very bad place. We are there because Brown and Darling failed to regulate casino banking, and then used all our remaining national credit to refund losses to the wealthy gamblers.
The economy is completely screwed – even worse than most forecasters and pundits are telling you, and certainly worse that Darling will admit on Wednesday.