Andrew Bell, CEO of Witan, gives his view on last week's budget and examines just how much the UK's debt mountain is going to cost.

The UK Budget last week presented depressing confirmation of the wasting away of the UK’s financial position, after a decade of well-intentioned but inefficient expansion in public services, followed by the costs of the credit crunch on one of the Western World’s most indebted economies.

Although the Treasury was for the first time in several years able to pare back its estimates for public borrowing, it still projects that the National Debt will rise from £952 billion this year to £1400 billion in five years time. This compares with under £400 billion in 1998.

The cost of servicing the interest on the debt is projected to rise 76 per cent from £42 billion this year to £74 billion in 2014. Since it is to say the least highly unlikely that the economy will expand by 76 per cent over the next five years, the interest burden will rise steeply as a percentage of our annual economic output.

A key concern is that official economic growth estimates appear rose-tinted. After a plausible 1-1.5 per cent this year, rates of over 3 per cent are forecast for the out years, despite the pressure on the public sector to retrench and on consumers to rein back on debt.

It is understandable, though not reassuring for international investors, that the detail over how to reduce public spending and raise taxes in order to reduce the annual deficit has also been left vague until after the election. The impression left was of a package that was internally consistent (“if the economy grows this much and we cut spending/raise taxes by this amount, the deficit will pursue the following path”) but only loosely anchored to the likely course of the economy. It reminds me of the University Philosophy exam question that asked “Is this a question?” to which either a genius or someone bereft of ideas had responded “If it is, this is an answer.”

In JM Barrie’s play Peter Pan (as adapted for the big screen by Uncle Walt) when the Darlings go out for dinner their children are taken to Never Never land by Peter Pan and encounter numerous perils before returning safely home. The Chancellor may not cut a Peter Pan figure (more a dead-pan one) but he was unable to disguise the prospect of a decade paying off the “never never” account accumulated over the past decade.

The focus in the coming heated weeks of electioneering will be on the character and pace of any fiscal tightening, with sterling vulnerable to uncertainties over the result, as well as needing to stay cheap to jump-start the UK’s manufacturing performance.

However, it seems that the more important agenda is how to boost the UK’s growth rate, without the helping hand that financial liberalisation gave to consumption during the past quarter century. Does the UK still enjoy the advantage in economic flexibility that it developed in the 1980s and can manufacturing take off without long-term government policies on investment, education and businesses’ costs to enable the UK to compete with lower cost economies or those with more established high-value manufacturing traditions?

These are longer-term issues relevant to the status of the UK as a location to do business. They are less vital to the UK stock market’s immediate relative attractions, in view of the substantial overseas earnings exposure of our leading companies.

However, as a more fruitful than expected first quarter of 2010 draws to an end, there are two storm clouds that could upset financial markets’ serenity in coming months.

The first is the risk of a growth shortfall, though probably not a double-dip into renewed recession. Usually, when recessions end the ensuing recovery gains momentum, as lower interest rates encourage spending and restocking followed by rehiring, spurring further income growth and, as capacity is used up, renewed capital investment. These linkages appear weaker this time, owing to the debt overhang and the extent of surplus capacity thrown up by the recession. So, economies might attain a level of growth that would be perfectly acceptable as a staging post towards a more full-blown recovery but which would be seen as disappointing if it persisted for a year or two. The appetite for cyclical risk could be vulnerable to a setback after the impressive rebound of the past year.

The second risk is that governments lose the confidence of bond markets, owing to the scale of debt issuance and the slow pace of bringing future deficits under control. Clearly a slow growth environment would exacerbate this risk, possibly leading to a rise in government borrowing costs, despite official best efforts to keep monetary conditions loose and bond yields low. Having eventually quite effectively controlled the management of the financial crisis the authorities might lose markets’ confidence in the recovery, with higher bond yields a wild card threat to both economic growth and equity valuations.

Having highlighted these two tactical worries (which need to be exorcised before markets can move on) it is worth noting that the form book of crisis management over the past year has been quite good. The authorities have in many countries boosted the money supply to counteract the credit crunch’s push to repay debt or hoard cash.

Central banks are mostly emphasising the need to keep policies accommodative, while the most hawkish, the European Central Bank, has been given an abrupt reality check by Greece on the consequences for Europe of premature tightening. Developed economies have returned to positive growth, with recapitalised banking sectors and some of the more strained companies a year ago having taken advantage of the easy monetary conditions to repair their balance sheets. It feels right to be guardedly optimistic but the hurdle for disappointment has been raised, now that risky assets are no longer cheap.