Pre-Budget Report 2009 - Treasury Contents

1  Introduction

1. This Pre-Budget Report takes place at a time of great uncertainty, both economic and political. Over the past 18 months Governments around the world have provided huge support to the financial system, to prevent its collapse. Many Governments have also intervened to protect the wider economy from the results of the financial crisis. At some point most of this support will need to be unwound, the timing of which is a matter of debate, and there will need to be a major consolidation in public finances, which have been badly affected by this support. The European Central Bank's December 2009 Financial Stability Review warned:

    All in all, the challenges facing the euro area banking sector in the period ahead call for caution in avoiding timing errors in disengaging from public support. In particular, exit decisions by governments will need to carefully balance the risks of exiting too early against those of exiting too late. Exiting before the underlying strength of key financial institutions is sufficiently well established runs the risk of leaving some of them vulnerable to adverse disturbances, possibly even triggering renewed financial system stresses. Late exits, on the other hand, can entail the risk of distorting competition, creating moral hazard risks that come with downside protection—including the possibility of excessive risk-taking—as well as exacerbating risks for public finances.[1]

2. In the United Kingdom the Government has injected immense resources into the banking system. In addition, it has attempted to bolster the economy in a variety of other ways. The VAT rate was temporarily cut from 17.5% to 15%. HMRC has given otherwise viable businesses longer to pay their tax liabilities. The Enterprise Finance Guarantee Scheme was introduced to support bank lending to small and medium-sized enterprises. There has been a range of policies designed to help particular sectors, such as the car scrappage scheme. The Bank of England has also intervened, reducing interest rates to 0.5 per cent. In consultation with the Treasury it has also implemented a policy of quantitative easing, introducing an extra £200 billion into the economy.

3. In addition to the economic uncertainty, the United Kingdom faces political uncertainty in the run-up to the next General Election. The two factors cannot be disentangled. Ms Karen Ward, Chief UK Economist of HSBC told us that business uncertainty about future government policy was delaying decisions which might benefit the economy:

    many of the businesses I have met over the past six months—their main concern […] is about the lack of clear fiscal consolidation or how it is going to come through, and that is holding them back from investing and holding them back from taking on new staff—considerably more than any other aspects of their business. They are concerned about higher taxes for them personally and then higher taxes for the people that demand their goods as well.[2]

Professor Sheila Dow, of the University of Stirling, also considered that the Government's forecasts might affect consumers' decisions, although she suggested it as a reason for Government caution in the information it gave:

    The trouble is there are two audiences: there are the analysts and those in financial markets who take a particular view of the Government's fiscal policy and, on the other hand, there are households and firms who would perhaps be encouraged to withdraw from spending if they thought that taxes were going to rise significantly in the future.[3]

Any forecast is subject to uncertainty, but we recognise that the uncertainties surrounding the forecasts in the current Pre-Budget Report are even greater than usual.

1   European Central Bank, Financial Stability Review, December 2009, p 17 Back

2   Q 16 Back

3   Q 57 Back

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Prepared 6 January 2010