Greenwood says the Budget extends to the Labour government’s record of “implausibly optimistic forecasts about the outlook for the economy.”
He says the Chancellor’s GDP forecast that the UK will return to growth by the end of 2009 and continue through 2010 and 2011 implies that the deep underlying structural problems of the UK economy can be resolved and cured in the next 12 months.
“These problems include household finances that have seen debt surge to over 170 per cent of disposable income, a financial sector that remains capital-constrained and therefore unwilling to lend, and government finances that are in structural deficit even during a boom.”
Greenwood also questions the assumption that quantitative easing will be a rapid success, pointing to Japan’s inability to turn its fortunes around in a similar situation.
He says: “The combination of weak tax revenues and continued high government expenditures results in frighteningly large projected budget deficits reaching almost 12 per cent of GDP in 2010. The hard truth is that if government expenditure expands from 40 per cent of GDP to 50 per cent of GDP as proposed, the underlying growth rate must fall, undermining all these comfortable projections.
“Therefore the government’s exit strategy from high levels of borrowing is simply not credible. It seems likely that these judgements will at some point be reflected in the relative performance of the UK economy and markets.”