Outlook How's this for an instant verdict from the markets on Alistair Darling's efforts? Within minutes of the Chancellor sitting down, bookmaker Paddy Power halved the odds on Britain keeping its AAA credit rating. Before the speech, you'd have got 3-1 on there being a downgrade over the next six months or so. By the time Mr Darling finished speaking, the odds had shortened to 6-4.
If you want a more conventional indicator of the extent to which the Chancellor is perceived to have shored up Britain's parlous finances, both sterling and gilt prices also weakened on the pre-Budget report – not so markedly as Paddy Power's odds, but enough to send a message. It is that Mr Darling has not yet done enough to convince our lenders that he will bring the public finances under control.
Still, there is time yet. Standard & Poor's and Moody's, Mr Darling's tormentors-in-chief, have made it clear that the grace period on a downgrade, barring catastrophes, extends beyond the election. Britain's public finances are deteriorating faster than those of other leading economies, but that is not the whole picture, for we start from a better position, believe it or not. Total net debt as a share of GDP in this country will reach 56 per cent this year on the Chancellor's projection, compared with 83 per cent in Germany and 85 per cent in the United States.
The problem for Britain is that if borrowing goes on unchecked – and we keep overshooting the projections set by the Treasury as we have repeatedly done in previous years – that comfort zone will be eroded rapidly, with our advantage reversed in double-quick time. This is the outlook that so worries the ratings agencies who inform our lenders.
Fear not, says the Chancellor. The Fiscal Responsibility Bill he published alongside the PBR yesterday makes it a legal duty for him to halve the budget deficit within four years. But it is not good enough to simply promise to comply with this legislation: Mr Darling has to tell us how he plans to deliver the pledge.
We certainly won't make a dent on those deficits – £178bn this year followed by £176bn in 2010/11 – with the tax increases the Chancellor has announced so far. The punishment of the bankers, for example, raises just £500m – and only for a single year. The national insurance increases we face from 2011 are a much more substantial attack – and on everyone in work, rather than just the rich – but they will still raise only £3bn a year. There will be other revenue-raising schemes, no doubt, but the combined effect of all these hikes will not begin to get the Chancellor to his targets.
If there is to be only a small increase in revenue from taxation, then spending cuts must take the strain of bringing down borrowing. But the Chancellor refuses to say where these cuts will be made. The overall target is a rise in spending over the next five years averaging 0.8 per cent annually – cuts in real terms in other words – but how will that number be achieved?
Mr Darling can't or won't say. "We have already set out clear and firm departmental budgets for the next financial year, but to try and fix each department's budget now, for the next five years, is neither necessary nor sensible," he told MPs yesterday.
He's right, for now. It isn't necessary to outline the inevitable spending cuts in detail because we have a bit of time before the credit rating downgrades are due to arrive. And it certainly isn't sensible to tell the electorate about the frontline services they will be losing just a few months before the election. Much better to announce further efficiency savings and the odd asset sale (though all the decent family silver was sold off some time ago).
The missing ingredient in the puzzle may be economic growth. Although the Chancellor has had no choice but to downgrade his forecast for 2009, he is sticking by the projections for future years that he made in the Budget earlier this year.
That may not be too big a leap of faith. The Bank of England for one – and remember that Mervyn King has his own doubts about the credibility of Mr Darling's deficit reduction plans – has made projections for 2010 and 2011 that are broadly in line with the Chancellor's.
Business, however, fears that even the relatively limited tax rises announced yesterday could choke off some of the nascent recovery. In particular, the increase in national insurance contributions for employers – the 0.5 per cent hike comes on top of a 0.5 per cent increase already announced – will endanger their prospects.
Certainly, it is fair to say that the cost of the extra contributions will comfortably outweigh the gains from the limited goodies chucked the way of business – deferral of compulsory pension contributions and so on – particularly given the Chancellor's refusal to countenance extensions of schemes such as cut-price VAT and the stamp duty holiday.
One might make the same point about personal taxation. Mr Darling would like us to think that it is those evil bankers who will bear the brunt of his tax hikes. But the much more significant national insurance increases will be felt by everyone earning more than £20,000 a year. Leaving aside the politics of that point, the rises will act as another brake on consumer spending. The real-terms pay cut for millions of public sector workers won't help much either.
Mr Darling's hopes of a strong economic recovery, in other words, may not be a pipedream, but nor are they guaranteed to be realised. That's yet another reason that the plan for a return to health may be blown off course.
In the background, meanwhile, those darned ratings agencies watch and wait. They will give the Chancellor until after the election to prove his case (though voters may not be so forgiving) but the day of reckoning has not been deferred indefinitely by this pre-Budget report.Reuse content