The Centre for Social Justice

A report by a senior city expert Malcolm Offord was published last week by Conservative Home. The report cast new light on the need for major welfare reform as the full extent of the economic downturn becomes apparent. The author says spending cuts of £100bn might be necessary.

Tim Montgomerie, Editor of Conservative Home, described the picture painted in the report of the UK finances as "devastating" and a challenge to all political parties to face up to the reality of the economic situation.

Montgomerie went on to summarise the key findings of the report:

"The characteristics of a sensible fiscal position: "As a rule of thumb, a well-run country would be characterised by government borrowing not exceeding 40% of GDP, a budget deficit of zero over the economic cycle (Gordon Brown’s now abandoned “golden rule”) but where public spending did not exceed tax receipts by more than 3% of GDP in any given year (the Maastricht Treaty rule)."

Britain is hurtling away from a sensible fiscal position: "In his Pre-Budget Report on 24th November 2008, the Chancellor Alastair Darling announced that he was planning a budget deficit of 8% of GDP in 2009-10... The Treasury does not plan on bringing the budget deficit down to the Maastricht target of 3% until 2014... If we add the initial £77 billion of financial stability measures taken by the Treasury to deal with the fall-out from the recent banking crisis (Bail-Out I) this figure rises further to £973 billion – 65% of GDP."

Worse than the 1970s: "The biggest single annual budget deficit since 1970 was recorded in 1993-94 at 7.7% of GDP; compare and contrast this with the 2009-10 projection of 8% of GDP (which was calculated before the two Bank Bail-Outs and the rapid deterioration of the economy in the last three months)."

Britain is haemorrhaging tax revenues: "Tax receipts are now in free fall. To put this in context, in their peak year of 2007-08, tax receipts from the financial and housing sectors alone combined to contribute £60 billion to the Treasury. The Chancellor’s forecast that tax receipts in the worst forecast recession since the War will fall only by £10 billion is likely to be unrealistic. For reference, tax receipts fell by 6.4% of GDP (£94 billion in today’s money) in the last boom-to-bust cycle from 1985 to 1994... "City bonuses have been slashed, financial sector and company profits are collapsing, the property market has stalled, capital gains are non-existent, savings rates have slumped, VAT has been reduced, the price for North Sea oil has fallen – and the list goes on. HMRC must be haemorrhaging tax revenues."

The consequences of a 5% recession: "If we assume that in 2009-10, UK GDP falls by 5% overall in real terms, we think that “business as usual” levels of public spending and taxation would lead to national debt (on the Maastricht definition) rising to around 105% of GDP by 2012 and continuing to rise thereafter to 156% of GDP by 2020."

Public spending has soared over the last fifteen years: "The first point to note is that current Total Managed Expenditure (TME) of £623 billion has grown over 15 years by 5.4%pa from the equivalent figure in 1993/94 of £283 billion. This is a long-term trend of real spending ahead of inflation: if TME had grown over 15 years in line with actual inflation of 2.4%pa during that period, current TME would amount to £404 billion. On that basis, we have increased real spending by £219 billion over the last 15 years."

Tim Montgomerie, ConservativeHome

Read Bankrupt Britain here