Gordon Brown’s speech at the IMF last week confirms once and for all that the government’s spending plans announced in July were an enormous blunder.
Those plans set out public expenditure plans for the next three years and involved huge annual increases of 2.75% over and above inflation.
The plans assumed that the economy would grow at some 2% in 1999 and2.5% in the following years. Even at the time, these assumptions were widely regarded as over optimistic but, when challenged, both Gordon Brown and Alistair Darling, the then chief secretary, protested that the assumptions were reasonable and, if anything, on the conservative side.
Even with such exaggerated growth assumptions, the spending plans still resulted in a public sector borrowing requirement of some #5bn per year.
Now, just three months on, Gordon Brown has had to admit to the IMF that these growth assumptions are wildly unrealistic. This puts the whole of the public finances into disarray. Even small changes in growth have an enormous impact on the level of tax revenue, welfare spending and hence the PSBR. If Gordon Brown does not rein in his spending plans he will either have to raise taxes again or allow borrowing to escalate further.
The government will of course seek to put the blame on the world economic situation. The reality is that the UK will suffer a deeper downturn than might otherwise have been the case because of the profligacy of the government’s spending plans. The spending spree has forced the Bank of England to keep interest rates higher for longer than would have been the case had government expenditure been maintained at more reasonable levels.
The real concern now is that many economic commentators are forecasting growth for the UK economy at even lower levels than Gordon Brown’s revised assumptions.
Within 18 months of a new Labour government, we are back to the economic crises so resonant of the past.
Nick Gibb is Conservative MP for Bognor Regis.
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