Is there more bad news out there?


As I said, the Chancellor’s estimate of his deficit for this year has risen again. Back in the 2008 Budget he predicted that this year’s borrowings would be £38 billion. In the autumn 2008 pre-Budget report he increased it to £118 billion. In the spring 2009 Budget it jumped to £175 billion, and now he is predicting £178 billion.

But in the 2009 Budget he was expecting the economy to contract by “only" 2.75% this year, and now he concedes that the true contraction will be 3.5% - an additional 0.75%. Surely an extra 0.75% fall in GDP would increase borrowing by more than £3 billion?

Let’s do a quick comparison.

A year ago, in the 2008 pre-Budget report, Darling estimated that GDP would fall by 0.5% this year, giving an estimated deficit of £118 billion. By the spring 2009 Budget the estimated fall in GDP was 2.75%, and the estimated deficit £175 billion. So an extra 2.25% fall in GDP gave an extra deficit of £57 billion.

OK, it’s only a crude calculation, but on that basis I’d expect today’s extra 0.75% fall in GDP to result in an increase of £19 billion in the estimated deficit, taking this year’s deficit to £194 billion.

That’s close to the £200 billion that various economic analysts were predicting recently, based on the Treasury’s monthly figures for tax collection. Hmm.