To what extent is the downturn permanent?
Much more than the Treasury would usually concede and it has been careful to say that it now thinks that economic output was 4 per cent higher than a sustainable level in mid 2007. That output, the Treasury thinks, will not come back.
This change has a profound effect on the figures presented in the pre-Budget report because the Treasury cannot pretend years of extremely rapid growth will follow the recession.
on Monday Mr Darling’s forecast showed a total loss of output of 5.5 per cent of GDP in 2008-09 and 2009-10 and this is followed by a gain of 0.5 per cent a year from 2011-12 onwards.
With the underlying performance of the British economy worse than thought, unemployment is likely to stay higher for longer and, even if it falls, output and incomes will be lower.
The main effect is a persistent deterioration in the public finances. While the Treasury believed the underlying government borrowing – after stripping out the effects of the economic cycle – would be 1.8 per cent of GDP in 2010-11, it now accepts it will be much worse at 5.6 per cent of GDP. This creates a large hole in the public finances that has to be filled over the next decade.
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