The UK’s budget deficit is a very deep hole indeed and it is going to take a very determined politician a long, long time to get the UK back to a balanced budget.  The borrowing requirement for 2009/10 is around £175 bln and next year (2010/11) it is forecast to be roughly the same at £180 bln. 

Take a quick look at the following HMRC table which shows all the money raised in taxes, etc. by the UK government in recent years.  In the best year ever (2007/8) a total of £451 bln was raised.  The recession has taken its toll and total revenues in 2009/10 are forecast to be £397 bln.

The most recent figures published by the Office for National Statistics show UK government current expenditure was £564 bln in 2008/9.

The difference between what the government spends and what it raises in taxes is just enormous.  And the difference is not simply the money spent on bailing out the UK banking system because these statistics exclude the money spent on financial sector interventions (deemed to be temporary spending).

Lets assume that the economy recovers and in a few years’ time HMRC tax revenues bounce back to their all-time high of £451 bln.  Also assume that all those people who lost their jobs in the recession find employment again and therefore subtract the £32 bln rise in social security benefits & tax credits since 2004/5 (i.e. well before the recession started) from the £564 bln the government spent in 2008/9.  This is how the deficit is halved by doing nothing except praying for a full economic recovery.  However it still leaves the UK with a structural budget deficit in the region of £80 bln.

This is not meant to be a political blog but sometimes politics impacts upon the economy and the markets.  This structural budget deficit of £80 bln is what needs to be tackled by the next government which is elected in May 2010.  Sadly no mainstream political party seems to be brave enough to spell out the size of the hole the UK is now in for fear that the electorate will be too afraid to elect them.  Whilst carrying on as before will appeal to the electorate because they think that way they will not get hurt, it is really not an option.

A future government will have to go further than the pay freeze for the highest paid public sector employees which Gordon Brown announced this week. However a problem with imposing public sector pay cuts is that for every pound the government cuts pay, it loses up to 40 pence in income tax revenue and the economy also suffers because the other 60 pence is not spent on goods & services anymore (with knock-on reductions in VAT collections, etc.).

The UK’s structural budget deficit is not entirely due to Gordon Brown’s tax & spend policies, but had he saved a bit when the going was good (instead of “investing in public services”) then we wouldn’t be in quite such a horrible mess today. 

However this £80 bln hole is what the 2010 election debate should be about - pace Bill Clinton, ”It’s the budget deficit, stupid”.