Who's going to pick up the bill?

I saw a wonderful Matt cartoon recently of a person in a restaurant, saying to the waiter, "I'm a banker could you give my bill to one of the other tables". Behind this amusing sketch lies a much more serious issue which more and more politicians and economists are starting to worry about. How much public sector debt will have been racked up by the time the financial system is stabilised and economic activity is back in the black, and who is going to pick up the tab?

I don't know about you but I've lost count of the bail out and stimulus packages, but get frightened by headlines that suggest the level of public sector debt amounts to a national emergency. But what are the real facts, what is the context in which we should be assessing the state of public finances? Well, I thought a recent piece of research from the PwC economics unit entitled Dealing with debt might help clarify the situation. Their analysis suggests that by 2013/14 public sector net debt, excluding the effect of recent financial interventions, will have risen to 65% of GDP (from today’s level of just over 40%). This would be the highest debt level in recent decades although still a long way below a figure closer to 250% after the last world war.

In 2013/14 the UK current budget deficit (excluding net public investment) is estimated to be around 3% of GDP, reflecting a fiscal gap (to you and I an over spend on current income) of some £43bn at today's values. If this gap is to be closed to get back to current budget balance some painful choices will have to be made.  My colleague analysis suggests there are two options:

• Option 1 - a real reduction in total public expenditure of 1.4% per annum on average in the three years to 2013/14

• Option 2 - a real freeze in public spending in the three years to 2013/14, supplemented over the same period by around £25bn of tax increases over and above those already announced.

I don't know what you think, but if I was a betting man, I'd be going with option 2. The question then becomes who's going to pay - individual taxpayers or the corporate sector? I know many of the UK's largest companies are already worried they will be in the firing line being asked to pay a disproportionate part of the bill. The way this issue is approached will be critical to the speed of UK economic recovery and as importantly is something which, if got wrong, could result in more companies dusting off their plans to relocate their headquarters elsewhere in the world. So as government considers who pays what, I hope due regard is given to the real contribution that business makes in terms of the taxes it pays. Too often the focus is on corporation tax and as this year’s Total Tax Survey for the Hundred Group highlights there are other figures we should be focusing on:

• Corporation tax is one of 22 taxes in the UK 
• On average for the Hundred Group, for every £1 of corporate tax, there was another £1.14 in other taxes borne and £3.88 in taxes collected
• In total the Group total tax contribution was £58 billion
• 48.6% of the value distributed by the Group surveyed, was paid to government in taxes borne or collected

Unfortunately, unlike the character in the cartoon I mentioned earlier, passing the annual £40bn bill to someone else in the restaurant isn't a feasible option. But more seriously, as the bill for our decade of excess is shared out, let's make sure we do not shoot ourselves in the foot and put the brakes on the wealth creating engine on which we all depend.  

As always I am pleased to hear your views and comments on the postings, and to take questions about corporate reporting.

David