Budgeting for known unknowns

7 Mar 08
PETER RIDDELL | The most tempting submission that Alistair Darling has received ahead of the March 12 Budget has come from Richard Lambert, director-general of the CBI.

The most tempting submission that Alistair Darling has received ahead of the March 12 Budget has come from Richard Lambert, director-general of the CBI.

He has put forward an alternative, six-paragraph speech. Darling’s speech will not be remotely as short as this. But Lambert is correct in one sense. This is not the time for big, dramatic initiatives. It will be an interim, tentative statement: a Budget in square brackets.

The main reason is, as Lambert argues, that we are in ‘uncertain economic times’, even more so than usual. ‘Compared with the other big industrialised economies,’ he states, ‘the UK is well placed to ride its way through the current global turmoil with its record for growth and stability unblemished. But while credit conditions continue to tighten, it is not possible to make credible judgements based on the near-term outlook.’

No-one knows whether the US economy is heading for a big downturn or what this would mean for us. Hence, any forecast should really have a range of possibilities.

Moreover, the fiscal position is already tight, with public borrowing and debt levels right up against the Treasury’s own limits, and on course to exceed them if action is not taken.

Indeed, everyone at last week’s Public Finance round table debate agreed that ‘we wouldn’t start from here’. Public finances had been allowed to deteriorate before the 2005 general election, not just because of the rapid rise in public spending but because the Treasury had been consistently over-optimistic about the yield from business taxes.

Some corrective action was taken after 2005, but the fiscal gap has widened again because of the economic troubles of the past few months, and especially the likely shortfall in tax revenues from financial services.

Yet the very difficulties and uncertainties that have exacerbated the fiscal position have made now the wrong time to take remedial action, as all the speakers at the round table recognised.

Almost no-one is arguing for tightening the fiscal stance now. Moreover, the already announced slowdown in public spending growth — a halving to just 2% or so a year in real terms — is due to start next month.

That means the Budget will inevitably be a holding operation, as Darling focuses on measures to bolster growth and on alleviating the problems of hard-hit groups. He is concerned about the difficulties caused by sharply rising energy prices for low-income families and for pensioners.

Darling will also report on plans to introduce more fixed-rate mortgages, though there are no panaceas for homebuyers who have

over-extended themselves with large mortgages. However, there has so far been none of the negative equity problems that caused such distress in the early 1990s.

One of the main political problems faced by Darling is the government’s pledge to eradicate child poverty by 2020 — a commitment recently reiterated by Gordon Brown. After a near-doubling in child poverty to 3.4 million — as measured relative to median incomes — in the 1980s and 1990s, there was a decline in the first half of this decade of about 600,000. But the recent trend has been flat and the government looks like missing its target of halving the total by 2010.

However, Darling does not have the almost £3.5bn required to hit the 2010 target. So what we are likely to hear instead is a repeat of the 2020 pledge, plus measures intended to demonstrate that the government is serious about achieving it.

These will include some limited increase in cash benefits to

low-income families, plus changes in housing benefit rules, and possibly in income tax for low earners.

The other big Budget problem is the largely self-induced one of defusing the row with the City and business over the tax changes introduced in October’s Pre-Budget Report. Darling has already announced concessions on capital gains tax proposals and taxing

non-domiciles. While he will want to reassure the City that he is not

anti-business or anti-foreigner, there is no chance of these proposals being dropped.

The bigger question will not be about measures in the coming year but about how fiscal policy can be brought back on track in the medium term.

If this is not the right year for the necessary adjustment — estimated at £8bn by the Institute for Fiscal Studies — when will it be? Will conditions be any easier in 2009 or 2010, both possible general election years? Darling’s credibility will depend on whether he can present a convincing plan for economic recovery and for reining back on borrowing.

Darling has a reputation for being low key in public, the man to take the drama out of a crisis. So don’t expect any high-flown rhetoric. Instead, it will be ‘steady as she goes’, with fingers crossed.

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