The report by the Treasury Select Committee casts severe doubt on the Treasury’s management of the economy. The Select committee second report on the Pre Budget Report is worded in diplomatic language but we clarify the gist of the statement.
The Treasury’s forecast in the Pre-Budget Report is for a swift recovery in economic growth for 2010, after a significant decline in output in 2009. The outlook for economic growth remains highly uncertain, but the balance of risks to the Treasury’s forecast is on the downside.
(We don’t believe the Treasury forecasts.)
The overall effect of the fiscal stimulus remains uncertain. The cost of the reduction in VAT is considerable and, in the view of the majority of commentators, the Treasury’s analysis of its impact is an optimistic one.
(We don’t believe the VAT cut will work)
The lack of bank lending remains the single most critical problem for the economy in the near term. The Government must ensure that the availability of credit, both to households and businesses, increases quickly. Without that increase in availability, the recovery of the economy will be placed in jeopardy.
(The bank bail out hasn’t worked.)
We are concerned that the terms of the original recapitalisation programme of the banks may be hampering their ability to lend. We note the conversion of preference shares held by the Treasury in RBS into ordinary shares.
(The bank bail out hasn’t worked, it may have made things worse.)
Interest rate reductions, while favourable to borrowers, once passed through by financial institutions lead to a decrease in income for savers. While the need for lower interest rates to maintain economic growth is crucial at the present time, the needs of savers must not be forgotten.
(Rates have been cut enough. Let’s not make the trip to Planet ZIRP)
The report warns of the risk of the "self-reinforcing deflationary cycle" facing the UK and says that now interest rates are close to zero, the Treasury should publish any action it is considering, should quantitative easing be required.
(What on earth is going to happen next? We need some forewarning.)
To summarise, the economic forecasts are unrealistic, the VAT cut isn’t working, the bank bail out hasn’t worked and may even have made things worse. Don’t cut rates any more and for heavens sake give us some idea about what is going to happen next with QE. Not exactly a ringing endorsement.
Treasury Select Committee : Second Report on the Pre Budget Report