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The Chancellor of the Exchequer (Mr. Alistair Darling): My pre-Budget statement today is made against a background of economic uncertainty not seen for generations. These are extraordinary, challenging times for the global economy, and they are having an impact on businesses and families right across the world. In these exceptional economic circumstances, I want to take fair and responsible steps to protect and support businesses and people now, while putting the public finances on the right path for the future That is what I will do today.
My central objective is to respond to the consequences of this global recession on our country, both now and in the future, so that we are ready to take full advantage of the recovery of the world economy. My aim is to provide support and protection for families and businesses when they need it most; to maintain our commitment to investing in schools, hospitals and the nations key infrastructure; and to put in place the measures necessary to ensure sound public finances in the medium term, so that as a country we live within our means. This is not one single initiative, but a comprehensive plan to support families, business and the economy. Because of the wide-ranging measures that I am announcing today and the many strengths of the British economy, I am confident that the slowdown will be shallower and shorter than would have been the case. I am also confident that the UK, as an adaptable and open economy, will be well positioned to benefit from a return to growth in the world economy.
First, let me turn to my assessment of the international economy. Because of better macro-economic policy decisions and continuing, deeper globalisation over the past 10 years, global growth has increased from 3 to 4 per cent.; inflation has fallen from 22 to 4 per cent.; and living standards have risen sharply, with 300 million people across the world lifted out of poverty. But a crisis that began, as America itself has said, in the US housing market has seen these benign conditions undermined. The problems in that sub-prime housing market rapidly spread to the entire global financial system, causing a disastrous tightening in credit and undermining confidence. The Bank of England estimates that global bank losses could eventually reach $3 trillionthat is as big as the economies of Italy and Spain put together. Global shares have fallen by 50 per cent. since May.
All this happened, too, at a time when the global economy was already suffering from unprecedented increases in energy, food and commodity prices. Those increases pushed up inflation everywhere, and added to the pressure on businesses and households. In the UK, inflation, although now falling, is still at 4Â1/2 per cent. In the euro area, inflation has been above the Central Bank target since mid 2007. In Spain, inflation peaked at 5.3 per cent., and in the US at 5.5 per cent. The result has been a sharp reduction in growth across the world: the euro area has been in recession since April; in Japan and Germany, gross domestic product has already shrunk by about 1 per cent. in the past six months; economic output is falling in the United States; and growth in China and India, too, has slowed sharply.
This is an unprecedented global crisis, but the World Bank and other institutions are confident that the global economy will recover strongly, predicting that it will double in size over the next two decades, helping to spread prosperity across the world. The root of todays problems are failings in the global financial system. The banking system is at the heart of all economies. Financial markets affect everyones daily life: if they fail to function properly, the impact is felt right across our economy and by every one of us, so restoring and maintaining financial stability is absolutely crucial.
The causes of instability are global, so the Governments response must mean working closely together with other countries. Earlier this month, the Prime Minister and I attended the G20 summit in Washington. A wide range of measures was agreed to increase transparency of financial activities, ensure better international supervision and prevent excessive risk taking. It is crucial that this plan is implemented. So with the UK holding the presidency of the G20 next year, we will take the lead in doing all we can to prevent a reoccurrence of these problems. We will build on the work of the Financial Stability Forum, which, for some time, has been looking at international agreement on capital requirements that reflect the economic cycle and risk.
Domestically, too, we need to make supervision and regulation more effective. The Financial Services Authority is now considering changes across the regulatory systemincluding banks capital requirements, liquidity conditions, accounting rules and pay structures. The new chairman of the FSA will also examine whether the right processes are in place to ensure that the FSA can supervise the system.
The current financial crisis has also illustrated two further issues. First, the recent financial turbulence has highlighted the potential problems with overseas territories and Crown dependencies, such as the Isle of Man and the Channel Islands [ Interruption. ]
Mr. Darling: The Crown dependencies, such as the Isle of Man and the Channel Islands, attract banking customers with lower taxeswithout contributing to the UK Exchequer. But at times of stress, depositors need to know who will compensate them. The British taxpayer cannot be expected to be the guarantor of last resort, so I have asked for a review of those regulatory arrangements, which will report to me in the spring.
Secondly, we must resolve the situation highlighted by the Icelandic bank, Landsbanki, where billions of pounds of British savers money was deposited in a foreign bank, with branches in the UK, with insufficient safeguards for those depositors. They were not adequately covered by the compensation scheme of the Icelandic authorities, so we had to step in to guarantee UK savers money. So we are taking the lead at the European Union to tackle these shortcomings in international compensation arrangements. We cannot allow that situation to continue, and we have asked the European Commission to come back with recommendations by the spring.
A strong banking system is vital to the health of our economy. It needs to be fair and open, offering a range of services and lending demanded by consumers. Because
of the Governments action over the past year, no retail depositors in British banks have lost out. Last month, we took action to improve confidence in the banking system and recapitalise the banks. By next month, banks will have accessed some £100 billion of funding under the credit guarantee scheme. Now that the scheme is up and running, and other countries are beginning to implement their own schemes, it is time to explore how it can further support lending to families and business. We shall continue to monitor the working of the scheme and improve it if necessary. I shall announce any changes shortly.
But we also know that the process to allow UK banks to raise money in the markets, through rights issues, is too slow and complex. Today, the rights issues review group, which I set up, has reported. I shall pursue its recommendations in full, which will make the process for raising equity capital faster and simpler. All these steps are aimed at combating instability, restoring confidence and improving protection for depositors, while defending the taxpayers interests.
Our economy cannot insulate itself from this global financial turmoil, but the UK economy faces these challenges from a position of relative strength compared to the past. Even today, employment remains near record highs. The claimant count, while rising, is 2 million below the level of the 1990s. There are still today over half a million unfilled vacancies in the economy. Government debt last year was among the lowest in the major advanced economies. At the same time, we have been able to triple public investment in key services, transport and infrastructure. We did fix the many roofs that needed fixingthe roofs of schools and hospitals throughout the United Kingdom. While all other major economies suffered recessions, we saw the longest period of continuous growth in the history of this country. That has brought immense benefits, and tens of thousands of jobs across England, Scotland, Wales and Northern Ireland.
The UK is the worlds leading financial centre, but because of the size of our financial sector we are likely to be affected more directly by a global financial recession. New lending has shrunk, down by a third since March. With mortgages harder to get and more expensive, this has hit property markets, with prices falling by 11 per cent. over the same period.
Mirroring the big falls in the world stock markets, UK share prices are down by almost a third. These falls came as businesses and families were already having to meet rising energy and food bills, which squeezed incomes and led to lower spending on other goods and services. The combination of higher prices and tighter credit has inevitably put downward pressure on growth here in the UK and across the world. The volatility in prices was underlined last month when inflation fell from 5.2 per cent. to 4.5 per cent, the biggest monthly drop in 12 years. But while it is volatile, inflation is expected to continue to fall, and this has already made room for the Bank of England to cut interest rates by 2 percentage points since October, to a 50-year low of 3 per cent. For the millions of people on tracker mortgages, this cut in interest rates will be worth on average around £100 a month off their mortgage payments. But monetary policyinterest rateson its own is not enough to
stimulate the economy, as most people recognise. So we need action now to boost economic activity, together with the real help that I will announce today, to help us to emerge more more quickly, and to emerge stronger, from these difficult times and to face the future with confidence.
I now turn to the detail of the economic forecast. These forecasts are made against a background of sharply deteriorating conditions across the world. The International Monetary Fund is forecasting a year-long fall in output next year across all advanced economies;the first time that this will have happened since 1945. The UK is no exception. UK GDP contracted by 0.5 per cent. in the three months to September. Growth this year is forecast to be Â3/4 per cent., which reflects a further fall in output in the fourth quarter of this year. The IMF is forecasting that the United States, Germany, Japan, France and Italyas well as the UKwill all contract next year as a result of weak consumer spending and business investment.
I, too, am forecasting that output will continue to fall in the UK for the first two quarters of next year. But then, because of decisions taken in this pre-Budget report, I expect it to start to recover, and GDP growth for 2009 is forecast to be between minus Â3/4 per cent. and minus 1Â1/4 per cent.
Inflation is forecast to come down sharply, reaching Â1/2 per cent. by the end of next year. Lower commodity prices and lower interest rates, which boost incomes and help business profits, together with the fiscal reaction across the world, will also help. As an open and flexible economy, the UK is well positioned to benefit from this recovery. As a result, and as the world economy recovers from the credit crunch, the United Kingdoms economy will begin to grow again. I am forecasting growth of between 1Â1/2 and 2 per cent. in 2010. In the years after that, the economy will continue to recover. Trend outputor the productive potential of the economywill initially fall, but in future years the economy will recover towards a rate of trend growth of around 2Â3/4 per cent.
Every country in the world is facing the impact of this crisis on its own economy, but there is a growing international consensusalthough unfortunately not shared in the Housethat we must act now to protect people and to help pull our economies out of recession, for there is a choice. One can choose to walk away, let the recession take its course, adopt a sink-or-swim attitude and let families go to the wall. That is no action plan. Or one could decide, as I have decided and as Governments of every shade around the world have decided, to support businesses and to support families by increasing borrowing, which will also reduce the impact and length of the recession.
I will do whatever it takes to support people through these difficult times. That is why my pre-Budget report today represents a substantial fiscal loosening to help the economy now with a £20 billion fiscal stimulus between now and April 2010, around 1 per cent. of GDP.
Before I describe the detail of how the Government will support people, let me turn to the fiscal framework that will help us to ensure fiscal sustainability. The Government introduced the code for fiscal stability in 1998, committing themselves to conducting fiscal policy in accordance with a clearly stated set of principles.
Our objectives are and remain to support the economy, to ensure medium-term sustainability and to maintain public investment. It meant that we were able to more than triple public net investment from 0.6 per cent. of GDP in 1997 to over 2 per cent. now. At the same time, we cut the Government debt from 43 per cent. of GDP in 1997 to 36 per cent. in 2007. Today, I publish the Treasurys assessment of the last economic cycle, which is supported by the independent National Audit Office. It shows that the last cycle started in 1997 and finished in the second half of 2006, and this means that the Government met both their fiscal rules over the last cycle.
The average current budget balance, over the cycle, was 0.1 per cent of GDP. But today, Britainlike every other country in the worldfaces an extraordinary global crisis, which means significantly lower tax revenues, both now and in the medium term. In the current circumstances, to apply these rules in a rigid manner would be perverse and damaging. We would have to take money out of the economy, making a difficult situation worse. So it is right that, in this pre-Budget report, we do all we can to support the economy, but also to ensure fiscal sustainability in the medium term.
Consistent with the code for fiscal stability, the Government are setting a temporary operating rule that requires us to set policies to improve the cyclically adjusted current budget each year, once the economy emerges from the downturn, so that it reaches balance and debt is falling as a proportion of GDP once the global shocks have worked their way through the economy in full.
The fiscal projections that I set out in this pre-Budget report are consistent with returning to current balance and debt falling as a share of the economy by 2015-16. They imply, as the economy emerges from the downturn, an adjustment in the cyclically adjusted current balance of over 0.5 per cent. a year from 2010-11, which will set us on a path to deliver our objectives of supporting the economy, ensuring sustainability and maintaining public investment. In addition, to increase transparency even more, I have asked the NAO to audit the Treasurys analysis of the cyclical fiscal position.
I now want to turn to the forecast for the public finances. Because of the economic situation, tax revenues are falling across the world. As company profits fall, so do the proceeds from corporation tax. Receipts from the financial sector alone are expected to reduce by 35 per cent. this year. Slower growth in wages means less income tax. Fewer people buying houses and falling prices mean less money from stamp duty, where tax take is down 40 per cent. Because of the scale of these global problems, it is inevitable that tax revenues will take some years to come back up. That all means that borrowing will be significantly higher than forecast.
As a result of the combined effect of lower revenues, our commitment to maintain spending and extra support to the economy, borrowing will rise to £78 billion this year and £118 billion next, or 8 per cent. of GDP. But then, from 2010, as I take action to reduce borrowing when the economy begins to recover, borrowing will fall to £105 billion, then £87 billion, then £70 billion and then £54 billion. By 2015-16, we will again be borrowing only to invest. [ Interruption. ]
Mr. Darling: This means that the projection for the underlying budget deficit, excluding investment, will be 2.8 per cent. of GDP this year and 4.4 per cent. next year. But consistent with my commitment to sustainability and as a result of my announcements today, the underlying budget deficit, excluding investment, then improves, as a share of GDP, to 3.4 per cent., then 2.3 per cent., then 1.6 per cent. and 1 per cent., projected to reach balance by 2015-16.
The economic crisis and the action by Governments across the world inevitably mean sharp increases in national debt relative to GDPwe will be no exceptionbut because we started from a stronger position, our debt will remain below that of other major countries. UK net debt, as a share of GDP, will increase from 41 per cent. this year to 48 per cent. in 2009-10, then 53 per cent., before peaking at 57 per cent. in 2013-14.
If we did nothing, we would have had a deeper and longer recession, which would cost the country more in the long term. So in these exceptional circumstances, allowing borrowing to rise is the right choice for the country, as the CBI, the Institute of Directors, the Institute for Fiscal Studies, the IMF and many other countries have all said in recent weeks.
We will continue to invest in public services, just as we have done over the last 10 years. Investing in school or hospitals, or modernising infrastructure and transport links, is not just an effective way of stimulating the economy, safeguarding jobs and protecting incomes. It is also vital for the future strength and health of our country. We have seen in the past the long-term damage that cutting public investment has on the essential fabric of the country and the support that people need. Since 1997, we have doubled the NHS budget, cutting hospital waiting lists. Spending on education is 60 per cent. higher, improving schools and exam results. Transport spending is up by 70 per cent, with over 130 major road schemes, and record numbers now travelling by rail.
Total Government spending on much-needed investment and public services has increased from £322 billion 10 years ago to £584 billion last year. Through the current spending review, we will continue to support and improve key public services, to meet the ambition of the people of this country. The challenge is to continue to deliver these improved services while ensuring that we continue to get value for money.
Today I can tell the House that, since 2004, the Government have delivered £26Â1/2 billion of efficiency savings, exceeding the target set by Sir Peter Gershon by £5 billion. Building on this, in last years comprehensive spending review, we committed to improve value for money, targeting a total of £30 billion by 2010-11, without putting public services at risk. But as the original Gershon report said, there is a point at which front-line public services would be affectedand we will not pass that point. However, having carefully considered the extent and the limits of efficiency savings, today I can announce that the Government will now find an additional £5 billion of efficiencies in 2010-11 for a total saving of more than £35 billion over three years.
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