ANOTHER year, another budget. Although Alistair Darling may not have been on his feet long for Wednesday’s budget speech, he said enough to stimulate debate across the financial community.
One of the main headlines was the substantial rise in Government debt. Although the Chancellor had previously budgeted for £80bn of gilts to be issued in 2008-9, this figure nearly doubled to £146.4bn by the end of the year. The original £80bn announced in last year’s budget already amounted to the largest sum ever issued by a British Government, and was a 36 per cent increase on the previous year.
Although it is not surprising that the Government needs to vastly increase borrowing, few would have forecast that debt will reach a predicted level of £1.4bn over the next five years, which is equivalent to nearly 80 per cent of the UK’s gross domestic product (GDP). If the prediction to borrow another £700bn over the next five years is accurate, this will be nearly twice the 40 per cent of GDP limit set by Gordon Brown as his “golden rule” for economic management.
To explain why we have found ourselves in such a difficult position, I have provided an easy to understand breakdown of the chain of events leading us to our current situation.
It all started in the US and was reported on CNN and NBC, as problems with traded CDOs (collateralized debt obligaton), which are a form of ABS. It quickly spread to the UK and affected HSBC, HBOS and RBS, which ended up losing its chief executive officer.
The Government stepped in to save the banks using money raised through the Debt Management Office.
Finally, VAT was reduced to try to stimulate GDP which the IMF predicted will fall.
Simple really!
What I feel is more of a concern, is that the Chancellor’s predictions for the vast sums which need to be raised has continued to move upwards at an alarming rate. Within Mr Darling’s Pre-Budget speech in November, the forecast was that in 2009-10 it would be necessary to raise £118bn within the gilt market. On Wednesday, the amount stated was closer to £220bn.
In fact, in a matter of five months we have seen predicted borrowing increase 60 per cent. We could, therefore, see borrowing escalate further before the Pre-Budget speech at the end of 2009, thereby causing an even greater problem for the Government. It is forecast that by 2010-11 the interest payments alone on national debt will cost taxpayers £42.9bn, which is more than the annual budget for the Ministry of Defence. This is a phenomenal figure to find each year, and will put a tremendous strain on the country’s finances.
Considering the national debt was only £350bn when Labour took office in 1997, the predicted rise over the next five years will be the equivalent of a 300 per cent increase.
It is this huge level of borrowing which could cause the UK to lose its AAA debt rating. It has been already been reported that the amount charged to insure a recent gilt issue was more than the cost to Cadbury for a similar debt issue. This could then result in the need to increase the coupons paid to gilt holders, which would be a further cost to the Government.
This could have already been illustrated last month, which saw the first failed auction of conventional gilts since 1995.
■ Michael Rankin is an assistant director in the Teesside office of Brewin Dolphin, and can be contacted on 0845-213-1340. All prices quoted in the article are from public sources. The views expressed are not necessarily held throughout the Brewin Dolphin Group. You should bear in mind that no investment is suitable for all circumstances and it is important to seek expert advice if in any doubt.
Brewin Dolphin Limited is a member of the London Stock Exchange, authorised and regulated by the Financial Services Authority.
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