The Budget and The £8BN "Windfall"

The ITEM club has estimated that public sector net borrowing will be around £140.2BN for 2010-11, £8.3BN less than the £148.5BN deficit forecast by the Office for Budget Responsibility (OBR).

Some sections of the media have foolishly referred to this as a "windfall", which the Chancellor can use to oil tomorrow's budget with.

This is of course nonsense, the Chancellor does not suddenly have access to an extra £8BN with which to "play":

1 This is merely a downward estimation of the level of increased debt that we are being saddled with each year.

2 The UK's total debt stands at £4.8 Trillion.

3 Our insane venture into Libya will put further holes in our country's finances.

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The False Dawn

The Ernst & Young Item Club has warned that the recent rise in house prices may in fact be a false dawn, they go on to say that property values will not return to their 2007 peak for at least another five years.

However, The Council of Mortgage Lenders (CML) report that the number of loans granted for house purchase in July was 19% higher than in July last year.

Seemingly, in the eyes of CML, this is the "first material annual growth" since early 2007.

The CML do admit that banks are still rationing the amount that they lend:

"The scarcity of mortgage supply and tough lending criteria is making it particularly difficult for first time buyers to enter the market.

Given that they typically purchase cheaper properties, this will have significant implications for those looking to trade up, clogging up the market and limiting the number of transactions taking place."

The banks, as they have always done, will only ever look after their own interests. Only if it is in their interests to kick start the property market, by loosening their lending conditions, will they do so.

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Living Beyond Our Means

Those of you who are yet to be convinced that we as a nation are living beyond our means, should read the Spring forecast presented by the Ernst & Young ITEM Club.

The report starts out optimistically enough, predicting growth of 2.9 % GDP for 2007 and noting that a rapidly expanding business sector is now driving UK economic growth faster than household or government spending.

However, ITEM then goes on to note that as a nation we are far too relaxed about risk, inflating assets and the costs of borrowing (as a result of the "benign" economic conditions in which we are living).

Professor Peter Spencer, Chief Economic Advisor to the Ernst & Young ITEM Club, says:

"Many people are following the Chancellor's lead and are borrowing to finance consumption. The UK's current deficit has reached 3.5 % of GDP which suggests that as a country we are close to the edge. Ultimately, we are all skating - not to say wobbling - on thin ice. There's a danger that we are slithering into complacency."

Spencer warns of an increase in interest rates, which will squeeze homeowners and borrowers.

Quote:

"...it is clear that interest rates will be pushed up again to 5.5% after the May MPC meeting, putting them 1% above their level in early August."

He warns:

"Both as individuals and as a country we have borrowed a huge amount to support this growth. The bottom line is that we are all living beyond our means.

In the short term, Mr Brown has resorted to borrowing for consumption. If the Chancellor is forced to borrow so much when the economy's so sweet, what will happen when it turns sour?".

Economies work in cycles, we have been privileged to live in a time when the British economy has enjoyed a lengthy period of growth and prosperity. However, history teaches us that at some stage, there will be a downturn.

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