Amongst the heavy use of smoke and mirrors in the Pre-Budget Report, there are three headline stories.

• The Chancellor has made the biggest ever cut to growth forecasts – dropping from his forecast of 2.75% to 0.5% for this year, then down to minus 0.75% – minus 1.25% in the first two quarters of 2009
• The borrowing the UK is now committed to is terrifying – £1 Trillion by 2013 -2014 and the strategies for its repayment have not yet been spelled out
• The growth forecasts on which the Chancellor has based the limit of our borrowing needs are widely considered to be very optimistic – back in surplus at 0.5% at the end of 2009 and from 1.5% to 2% in 2010.

By 2013 – 2014 we will be borrowing £1 Trillion – 57% of our Gross Domestic Product (GDP), the highest in history, worse even than the 1970s when the UK suffered the humiliation of having to go to the International Monetary Fund (IMF) to be bailed out. The current limit on the national debt is that it should not exceed 40% of GDP

How this will be repaid is both unclear and uncertain. With the exception of the higher rate of income tax at 45% for incomes over £150,000 – which is more gesture politics than an earner – only two measures were proposed:

• £5bn of Government department efficiency savings in 2011. Efficiency savings historically are rarely actually made and are very hard to demonstrate convincingly.
• £5bn from a 0.5% rise in National Insurance contributions from both employees and employers from April 2011. The rise in NICs, which will hit workers and employers, is the only real contribution to the repayment of borrowing.

Before this afternoon’s mini-budget, For Argyll said: ‘Expect generosity more apparent than real’. We could not have been more right. It was sleight of hand all the way.

• £20 billion injected into the economy between now and 2010 – and £40 billion taken back in raised taxes.
• A temporary (to end 2009) 2.5% reduction in VAT to 15% – to be offset by a permanent rise in fuel duty. This will hit the Highlands particularly hard – there is usually no alternative to the car; and freight costs for businesses will rise
• Small businesses have not been given a reduction in corporation tax, but the planned 1p rise in this tax will be deferred. Instead of a reduction in corporation tax, SMEs will be given latitude to spread the payments of all their taxes – VAT, Corporation Tax and National Insurance Contributions (NICs) – over an extended period. They will, of course, be incurring more tax debt while they spread repayments of current tax debt. They will also have 0.5% increases in employers’ NIC’s from 2011.
• Pensioners will get a one-off payment of £60 for an individual and £120 for a couple added to their £10 Christmas Bonus – from January 2009. This means not this year.
• Basic rate taxpayers will see compensation for the removal of the 10p tax band continue with a reduction of about £145 in their annual tax bill. But all workers (and employers) will pay an additional 0.5% in National Insurance Contributions NICs) from 2011.
• From 2011, those earning over £150,000pa will pay a new higher rate of tax of 45% on earnings over that limit. The Chancellor said that this will apply to 1% of incomes. It will see someone earning £250,000 pay an additional £5,000 a year. At the same time, the spending power and habits of the rich are likely to gain from the 2.5% cut in VAT for the next 13 months.
• Motorists will simply see a slower phasing in of the differential vehicle excise duty which will reward low emission vehicles. 2009 will see a flat rate £5 rise for all vehicles. 2009 will see heavy polluting vehicles pay a maximum rise of £30; and lower polluting vehicles pay the same or less.

Before this afternoon, For Argyll said: ‘Expect a June 2009 election’ It looks like we were right on this too. The VAT cuts will last until the end of 2009. Neither the rise in NICs for employees and employers nor the higher rate income tax for the top 1% will hit until Spring 2011, giving a bit of leeway in case the election runs to the wire in 2010. The heaviest Government borrowing will not take place until after 2009.

• This year, 2008, we will borrow £78 million.
• In 2009 it will rise to £118 million or 48% of the UKs Gross Domestic Product (GDP).
• But by 2013 – 2014 the national debt will have risen to 57& of GDP – and it may well be worse since, as noted above, this projected borrowing need is based on growth forecasts higher than anyone expects. The current limit to the national debt is is 40% of GDP.

So in the best possible circumstances and in the fastest possible time, it will be 2015 – seven years from now – before we are in a position to start paying anything back. This is the burden each of us now carries. We have indeed mortgaged our children’s futures.

The £20 billion of giveaways from now until April 2010 includes – and this is not an exhaustive list:

• £4 bn from the European Investment Bank for our banks (and there are seven in the queue already) to pass on to small businesses.
• £2bn in loan guarantees for small businesses
• £1bn in support for working capital of small exporters
• Businesses going into loss will be able to offset losses to a maximum of £50,000 against three years of profits
• £3bn of spending brought forward for motorways, housing, schools and energy efficiency
• Introduction of a Savings Gateway for low income savers – but, everyone missed this, not until 2010. The Government will add 50p for every £1 saved in Savings Gateway accounts. These will be available in banks, building societies, credit unions and – a genuinely good one – Post Offices.
• Child benefit support – with both currently proposed rises to be paid together from April 2009, adding around £2,035 for middle income families
• A rise in the Basic State Pension to £95.25
• A rise in Pension Credits to £130 for an individual and to £198 for a couple
• A payment of £70 to disabled children
• £15mn for a free Debt Advice service for all
• £775mn for social housing
• £535mn brought forward to pay for 200 more trains and increase environmental protection and flood defences
• £100mn of new money and £50mn brought forward to pay for insulation in another 60,000 houses in low income families

Warning to Savers – Avoid Isle of Man and Channel Island Banks. These offer attractive rates but because of their individual constitutional relationship to the UK, they contribute nothing to Exchequer. The Chancellor has called for a review of the position of these banks in relation to deposit guarantees. He made it clear that the UK is not going to be ‘universal guarantor’ and does not intend to guarantee accounts in these banks.

A final and sobering note on the situation we’re in is that the cost of insuring against the Government defaulting on Bonds it sells on the stock market has risen sharply in the last few days. It is now second only to Italy – a chilling measure of how our economic stability is viewed by the outside world and by the financial markets. Having said that, the FTSE rose quickly by 10% after the Pre-Budget Review – a sign of confidence by the financial markets, for the moment.

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