1. What is Alistair Darling's task?
In the Comprehensive Spending Review and the Pre-Budget Report, which will probably be delivered in a combined statement early next week, the Chancellor has to set out the Government's long- and short-term public-spending priorities, and indicate broadly how they will be paid for. He will also seek to demonstrate that the Government is operating within its "golden rules" on public finance.
Thus, Labour believe, will their reputation for sound fiscal management be maintained, while they will seek to paint their Tory opposition as offering "unfunded" tax cuts and spending commitments. With an election imminent it will be as significant politically as economically. Most City figures discount its significance for investors, with the focus of attention having moved over the past decade towards the Bank of England and the Monetary Policy Committee .
2. What does it tell us about the election?
The timing could be quite tight, if Mr Darling's statement is to be the first shot in an election campaign. Things are too late to have an October poll.
If Gordon Brown wants to set 1 November as polling day, then he will have to call an election and dissolve Parliament by next Tuesday, 9 October at the latest. It would be odd to go to the country without first having presented to the Commons the set-piece Comprehensive Spending Review, which will have a close read across to much of Labour's manifesto. (Given that the Conservatives have also committed to Labour's spending plans for their first two years in power, it will also dictate part of their platform as well).
That would point to Mr Darling making a statement as early as next Monday. For a November 8 poll, Mr Brown would have to go to see the Queen by 16 October. Any later might really be pushing the electorate's patience, or Her Majesty's.
3. How is the economy doing?
OK. Mr Darling will no doubt repeat his predecessor's proud claim that the UK is still experiencing its longest unbroken expansion on record, having grown for 60 consecutive quarters by the end of this year. We'll be reminded that we've been through tough times before and done alright – dot.com bust, 1998 East Asian crisis, hedge fund collapses. Despite the turmoil that swept the credit markets, growth in 2007 looks to be in the bag, with the Office for National Statistics' latest report showing a very healthy rate of 3.1 per cent on 2006, and the OECD upping its forecast for UK growth over the whole of 2007 to the same number. Thus the Budget prediction in March for growth between 2.75 per cent 3.25 per cent seems sound. But that is mostly "BC", or Before Crunch.
Next year is trickier. Mr Brown told us in the spring that the British national income would increase by between 2.5 per cent and 3 per cent in 2008. It will probably end up close to the bottom of that range, and the Chancellor might be wise to massage expectations in that direction. If he were being truly cautious he might push the range down to the 2.25 percent to 2.75 per cent band, and blame it on events in America. Most economists have shaved 0.1 per cent or 0.2 per cent off their growth estimates for next year, but some much more, with the more pessimistic closer to 2 per cent. It's no sign of a recession, but it would make a much bigger hole in Mr Darling's sums.
4. Room for manoeuvre?
Not much. Gordon Brown set a rigid framework in his last budget. Public spending is to rise by no more than 2 per cent a year after inflation between now and 2010-2011. This is about half the rate we've been accustomed to, and not far from the sort of miserly growth in public spending seen in Labour's first few years in office after 1997, when they stuck to the Conservatives' plans. The share of the national income taken by public spending is still scheduled to rise, though at a slower rate, to reach 42.6 per cent next year, the highest in almost 15 years.
5. Do Mr Darling's numbers add up?
All official numbers add up because civil servants strain every sinew to make them do so. The question is how sturdy they look.
At the moment, as the charts show, the Government is borrowing more than it was last year, about £3bn or so, and is predicted to be borrowing still more. This is bad news, as the government said that borrowing in 2007 would be lower than in 2006, and it is not on target to achieve that goal. Looking forward, revenues will also probably start to weaken as a result of lower growth. On the basis of research earlier this year by Credit Suisse, Mr Darling could lose as much as £10bn per annum in tax take as City bonuses and profits in financial services take a dive. This means that spending plans will come under pressure. Mr Darling may have to make some heroic assumptions to make everything fit.
6. What can we expect?
Everything from announcements on Crossrail and the National Health Service to relatively trivial tax adjustments. What will be interesting to see is the as-yet unannounced plans for the National Health Service, housing, and transport. Each of these is a potentially explosive political issue.
On the NHS, it seems fair to assume that the Government won't be able to return to the 7 per cent per annum real-terms increases in health spending that characterised its second term. Derek Wanless, the author of the Government's various reviews of the NHS, has suggested that a 4.4 per cent increase in spending in the NHS would now be required; Mr Darling will probably have to live up to that somehow, although he could fudge the numbers with efficiency savings.
On housing, Labour's deputy-leadership election showed the depth of feeling within his own party on that; and expectations of a breakthrough on the Crossrail project – bringing in private finance as well – are very high. A few marginal constituencies run along the route, too.
7. What about my taxes?
It's unlikely to be tax-cutting bonanza, though a few "green" taxes may be scheduled to rise. Nor is anything radical likely to happen to inheritance tax, the treatment of non-domiciled individuals, and private equity. Minor changes could be announced, and Mr Darling might choose to think aloud about reviewing these yet again. More attention will be paid to the tax changes pre-empted in Mr Brown's last budget and coming into effect over 2008 and 2009; the 2p cut in the basic rate, the abolition of the starting 10p rate, the hike in national insurance and rise in the 40 per cent rate tax threshold.
8. What, no crowd pleasers?
No fireworks, anyhow. Mr Darling's skill lies in defusing the most politically explosive issues, which is presumably why his unique brand of reasonableness was deployed in such turbulent departments as Transport and Work and Pensions. However, it would be surprising if there was nothing of political advantage to be unveiled. Chancellors usually pick items with a high public profile but with minor implications for the public finances for such showing off. Stamp duty, the tax treatment of company cars, possibly an increase in inheritance-tax bands, time limits on non-domicile status, tax breaks for green home technology could all win some useful headlines at small cost.
9. What do the experts want?
The Institute for Fiscal Studies says that "the golden rule should be more forward-looking, less reliant on our ability to date the economic cycle and should take explicit account of the significant uncertainty around any fiscal forecast".
Accountants BDO Stoy Hayward in turn suggest that Mr Darling should "increase the inheritance tax threshold to at least £500,000, making sure the tax hits those it was meant to, not moderately affluent house-owners".
Most tax experts expect something after the Arctic Systems case reached the House of Lords. Ernst & Young explains that this "concerned the tax-saving arrangements used by thousands of husband-and-wife businesses, and led to a Government commitment to 'bring forward proposals for changes to legislation'. These changes, which we are expecting to be announced in the Pre-Budget Report, are likely to further embed the concept of 'family unit' into the tax regime."
10. What could go wrong?
Not much, short term. Medium term, quite a bit. A doomsday scenario sees UK companies squeezed as banks pull back on lending and increase rates on the one side, and a consumer spending slowdown hits revenues on the other; unemployment and the fear of it knocks confidence.
If the UK follows the US and Europe into housing slump, the spectre of negative equity could stalk the land again. There's not much chance, but enough to make a quick election that little bit more likely.Reuse content