The UK’s loss of its triple A rating is symptomatic of the deep problems confronting the chancellor ahead of the Budget. And everyone is falling out over who is responsible for the mess the economy is in
Mervyn says George is to blame for him missing his inflation target (again). George says that’s not fair, it was the others wot made him do it. New boy Mark says you’re all wrong, it’s the target’s fault.
Confused? You will be, once the initial skirmishes between the Bank of England and the Treasury, and increasingly within the coalition itself, turn into all-out turf warfare ahead of the Budget on 20 March.
Always a dangerous moment for besieged chancellors, this month’s big day is shaping up to be George Osborne’s most serious test yet. The downgrading of the UK’s triple A credit rating is a curtain-raiser he could have done without.
At a minimum, the chancellor must avoid the omnishambles that surrounded his performance in 2012. That Budget will forever be remembered for its ill-conceived taxes on pasties, caravans and much more.
But Osborne must also come up with some answers. As Jonathan Portes argues in this month’s Public Finance, this is the slowest recorded recovery in the UK’s economic history. GDP is unlikely to return to 2008 levels until 2018.
With the economy edging perilously close to a triple-dip recession, incoming BoE governor Mark Carney is casting around for new, more ‘flexible’ targets – and the outgoing one is looking for who to blame for the dismal growth.
Meanwhile, Treasury Chief Secretary Danny Alexander is wagging his finger at Cabinet colleagues, accusing those unwilling to take a £10bn hit to departmental spending of ‘fiscal nimbyism’.
Given the fierce arm-wrestling over the spending round, this not-in-my-ministry response is to be expected. But the depth of Whitehall acrimony goes a lot deeper than usual.
As Colin Talbot points out in the March PF cover feature, the coalition’s deficit reduction strategy is looking increasingly shaky.
Borrowing is predicted by the Institute for Fiscal Studies to be £64bn higher by 2014/15 than originally forecast by the Office for Budget Responsibility.
‘Non-protected’ Whitehall spending is set to shrink by a third by 2017/18, and public sector employment will fall by another 1.2 million.
That’s an awful lot of pain – and reduction in demand – for the economy to absorb. So what can Osborne pull out of his red box on Budget day?
Not a lot, if he limits himself to tinkering with tax allowances, supply-side tweaks, or some other bits of fiscal eye-candy.
On the other hand, if he listens to the IMF and the growing body of economists pressing for large-scale economic stimulus, via infrastructure spend and other measures, it may still be possible to stop the squabbling – and turn the listing ship around.
In view of the Moody’s verdict on his benchmark credit-rating – and at risk of repeating himself – the chancellor could do worse than call the radical new approach a Budget for Growth.
This article first appeared in the March 2013 edition of Public Finance magazine
