Saturday, January 24, 2009

UK Budget Deficit 2009

For latest UK Budget deficit statistics see: UK Budget Deficit.

2009 Post

The UK budget deficit is the annual borrowing requirement and looking at Treasury projections public borrowing will rise sharply over the next few years.

Government borrowing is predicted to be so high this year because of
  • Cyclical factors. In a recession tax revenues fall. People earn less so income tax receipts. People spend less so VAT revenues fall.
  • Falling house prices particularly affect stamp duty.
  • Income tax receipts have been hard hit by the fact the recession has hit the financial sector hardest. It is high paying city financers who pay a disproportionate amount of income tax.
  • As unemployment rises the government is forced to spend more on unemployment benefits.
  • Bank bailouts are costing the government more than originally anticipated.
The extent of government borrowing depends on how quickly the economy recovers from recession. In the past treasury forecasts have proved too optimistic and growth has fallen more than anticipated. If the recession is deeper than predicted and if house prices continue to fall, it is likely these forecasts for annual borrowing will be higher.

On top of these cyclical factors, there is also the underlying deterioration of public finances due to demographic factors.

The only crumb of comfort for the government is that at least interest rates are low making the cost of servicing the national debt low.

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