Public finances: what the economists say

David Kern, chief economist at the British Chambers of Commerce (BCC) The December deficit, although lower than expected , does not justify any complacency. The UK's deficit is still massive by historical standards and debt has risen to a record high. Nevertheless, there is a realistic possibility, on the basis of recent trends, that the outcome for this year will be slightly lower than the Chancellor's Pre-Budget Report forecast of £175bn. "Action still needs to be taken to ensure that our AAA rating is not threatened. In the forthcoming Budget, the government must spell out its medium-term fiscal plans with greater detail. A freeze in the overall public sector wage bill, and efforts to contain ballooning public sector pensions, would enhance credibility and persuade the markets that the government is serious about cutting the UK's unsustainable deficit, and about enabling business to drive recovery. Colin Ellis, European economist at Daiwa Capital Markets The busy UK data calendar continued today, with the release of public finance and provisional broad money data for December. The public finance figures stole the limelight, with public sector net borrowing (PSNB) in December coming in at a significantly smaller-than-expected £15.7bn in December. While that is still the third largest PSNB during the current fiscal year, December tends to be a poor month for the public finances, so the smaller-than-expected borrowing figure will have been welcomed in Whitehall. "And, coupled with changes to past data, including a £1.6bn downward revision to November's PSNB to £18.7bn, Chancellor Darling now looks well on track to meet his borrowing forecast of £178bn for FY09/10. Much will depend on this month's figures - January is typically a bumper month for tax receipts - but, for now at least, Darling is proving his doubters wrong. "But, as welcome as today's figures are, they obviously do not change the big picture, which is one of a massive fiscal deficit. Howard Archer, chief UK at IHS Global Insight The less dire-than-expected public finance data for December does not alter the fact that major fiscal surgery is needed for an extended period involving further (and clearer) spending cuts as well as tax hikes. Mr. Darling still faces a very difficult March budget as last December's Pre-Budget Report left many questions unanswered over how exactly the government will return the public finances to health over the medium term. "While it is likely that many spending cuts and tax rises will not be announced before the looming general election, if the next government fails to address the issues at an early stage, it is likely that the credit agencies and the markets will lose patience with dire consequences for the UK economy. Andrew Goodwin, Senior Economic Advisor to the Ernst & Young Item Club Though borrowing continues to set new records, the situation could be a lot worse and the overshoots compared with last year have become much smaller in recent months. Indeed with the tax on bank bonuses likely to raise more than expected and the increase in the VAT rate boosting revenues from January, the deficit for the financial year as a whole might well undershoot the Chancellor's forecasts. The most important issue, however, is what will happen to the deficit as the economy recovers. The Chancellor's current forecasts are far too optimistic, both in terms of the speed of recovery and the extent to which tax revenues will recover. And as he continues to provide little detail about the nature of future spending cuts, significant overshoots are likely to continue unless there is considerable tightening after the election.