Economic View: You can bring forward reports, you can bring forward elections. But time will stand still for the harsh figures

The Budget next spring promises to be tighter than any Gordon Brown ever faced. And if it isn't, we will have to crawl all over the numbers
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The Independent Online

It has come a little early this year and I wonder why. Normally we get the pre-Budget report in late November; now it is coming out on Tuesday, along with the Government's Comprehensive Spending Review.

There is of course the obvious political issue here, but I think is it is worth stepping back from that for a moment Whether or not an election is called, and whatever happens if it is, the background remains the same. The global economic situation is completely unaffected, the UK economic issues don't change, and the choices the Government makes on taxation and spending have only medium-term consequences.

So how should we greet this great wodge of information coming out on Tuesday afternoon? The short answer is, with caution, because it always takes a few days to figure out what is new and real and what is old and spin. There will be a lot of fizz-and-bang electoral stuff: tax cuts real and imaginary; boosts to services real and imaginary; the ritual surprises and so on. So stand back and look long. Here are half a dozen things to watch out for – three in the pre-Budget report and three in the spending review.

First, and most obviously, there will be a new forecast for the UK economy. How low will they go for 2008 and what will be the market's response to that? The Treasury gives a range for growth rather than a single number and that range will be cut a bit, probably to 2.25 to 2.75 per cent. If that is what turns out to be achieved, it will be a slowdown from growth this year of close to 3 per cent but above the present consensus of predictions of around 2.2 per cent. Some forecasters are now expecting less than that: I saw one at 1.7 per cent. So the issue here is very simple: is the Treasury being too optimistic?

The second thing to look for follows from that. What is happening to government borrowing and where is that projected to go? It is running a little above target for the current year despite the strong growth in the economy, and that must be a worry. But what are the consequences for the year beyond? Barclays has been doing some sums that suggest the projected move towards a surplus on current spending is far too optimistic, and I think that judgement must be right.

But if the "golden rule" – that current spending must, over the economic cycle, be paid for by taxation not borrowing – is to be met, then a swift move into surplus is essential. Expect the rule to be modified. This may not be a bad idea, but it would be good to feel there is a genuine intellectual basis for changing it, rather than a political one.

The third thing to look for is what is happening to tax revenue. It has been more or less on course so far this year – a little off but not terribly so. But now a few things are happening that will undermine it in the months ahead.

One is in house sales: quite apart from what is happening to prices, there has been a marked decline in activity. If mortgage availability continues to fall, as seems inevitable, the housing market will gum up, affecting both stamp duty revenue and to some extent retail sales, which in turn will cut VAT receipts. At some stage, too, people will need to rebuild their savings, putting further downward pressure on VAT revenues.

Other adverse factors include the fallout from the bumpy couple of months in the markets: loss of revenue from corporation tax on financial services firms; and lower income tax receipts from lower bonuses. None of this is terrible – it's just that revenue figures seem to be softening already and look likely to soften quite a bit more.

Put all this together and the outlook for the Budget next spring ought to be tight, tighter than anything Gordon Brown had to face as Chancellor. If it does not look tight, we will need to crawl over the numbers and see what they have done to make the picture better.

Now for the spending review. The thing you have to remember here is that this is pretty flaky stuff. It is a useful exercise to look forward five and more years, but it is only an exercise. Not only is there every chance that there will be a government of a different hue in the latter years of the plan, but things happen that have huge and unpredictable fiscal consequences. For example, the previous spending review could never have foreseen that a million or more people would come into the country following EU enlargement, enabling an increase in the underlying growth rate. Still, the spending review is a useful discipline because it points up dilemmas and choices.

The first thing to look for is the big number for the growth of public spending as a percentage of GDP. We know the surge in spending of the past seven years is over; this was funded largely by additional borrowing and it can't go on. The question is, how lean will the next seven years be? Assume an underlying growth rate of 2.5 per cent; there is then a big difference between spending rising at 2 per cent a year and 2.5 per cent. There will be a long squeeze on spending – a drive to improve the productivity of every aspect of the public sector. Any feeling for the nature of that would be helpful.

The second thing follows on: what will happen to employment in the public sector? That has been falling now for more than a year. Will this continue as a gentle decline or something more radical? In practical terms, you cannot reduce headcounts in the public sector suddenly – nor should you want to. But it will be good to get a feeling for the ways in which the Darling vision is different from the Brown one.

And finally, look not at where more money is being spent but where less is being allocated – where is the squeeze really going to bite? The harsh numbers here will matter a lot more than the spin that experienced politicians can put on them. Probably the most important single economic concept is "opportunity cost": if you put more resources into one thing then something else will have fewer resources. Keep that in the back of your mind.