Hamish McRae: The numbers look better but we should stick with Plan A

Economic Life: The recovery remains fragile, but a touch less so than it seemed at the start of the year

The backcloth for the Budget is now pretty much set. With less than four weeks to go, most of the information about the UK economy is on the table, a Greek patch is done, and signals from the US suggest the recovery there is reasonably secure. There remains uncertainty about the Middle East and particularly the oil price, but that uncertainty will still be with us next month and beyond.

Click HERE to view graphic

So what does this tell us about the likely shape of the Budget? Well, the first point to make is that one big number, the size of the deficit this fiscal year, looks somewhat better than it did back in November. The second point to make is that another big number, that of likely growth this year, may be a little better too. And the third point, I am afraid, is that though these big numbers may be better, the detailed performance of the economy remains at best uneven, at worst fragile.

The deficit first. The original planned deficit for this year, as set out in the June 2010 Budget shortly after the Coalition came to power, was £116bn. The deficit for the coming fiscal year, the one that starts in April, was £89bn.

To remind you of the slippage that has taken place, by last November the forecast deficit for this year had been revised upwards to £127bn and for the coming year, to £120bn. Look forward another year, to 2013/14, and the original plan was to get the deficit down to £60bn, whereas the revised plan was that it would still be £100bn Basically, the deficit reduction programme had slipped two years.

We have just had figures for the running deficit to the end of January, a big tax receipt month, and with two months to go the number-crunchers in the City think the deficit this year may turn out to be £117bn -£119bn, within fighting distance of the original £116bn estimate.

You can see last November's forecast from the Office for Budget Responsibility (OBR) in the fan chart and I have added the centre point of the original forecast as a dotted line. The original plan seemed at the outer edges of the possible last November. Now, for this year at least, we may be pretty much there.

So what should the Chancellor do? Say, haven't we done well to get things back under control and let's try and stick to Plan A? Or say, haven't we done well to do better than we seemed to be doing last November and have Plan A plus, with a few tax cuts?

My own feeling, for what it is worth, is that the problem with the Coalition's policy is not about the pace of the correction but rather with its detailed measures. If the Coalition could get some way back towards its original plan that would be preferable, but everyone recognises that the pace of the correction is to quite a large extent outside the Government's control.

Maybe these slightly-better than expected figures give a little scope for tax cuts, but the stark fact remains that the national debt, currently £1,000bn, will rise to around £1,400bn before it starts to come down. That debt will hang over the country for another decade at least.

As for the economy, the recovery remains fragile but a touch less so than it seemed at the beginning of the year. People then were warning of a return recession, but stronger reports from the services sector and surprisingly strong retail sales make that less likely.

There is a further problem, however, with the growth statistics: we do not know what has actually happened until several years after then event. Last November the OBR noted how they are frequently revised upwards, with the fall from peak to bottom during the early 1990s recession being reported in 1992 as being 4.2 per cent, whereas it eventually was calculated at only 2.5 per cent. Growth was also under-recorded during the last boom, as you can see from the second chart, taken from the OBR report.

Had Gordon Brown and Mervyn King known the correct figures and been aware how the boom was getting out of control they might have done what some of us had been urging and tightened fiscal and monetary policy in time.

So we have data which suggests a scruffy recovery, with output up only 0.9 per cent last year. As a result, the Bank of England has its foot on the quantitative easing accelerator and is keeping interest rates far below inflation.

The Bank owns one quarter of the national debt. Yet if past experience is at all correct, those official figures for growth are under-reporting what has been happening, and in five years' time that we may know growth has been appreciably stronger than has been recorded. The Chancellor has to work with the figures as they are, but he needs to be aware that they are probably – on the basis of past experience – wrong.

Faced with these uncertainties, my instinct would be for him to make as little change as possible to broad macro-economic policy, but within that framework focus on detailed changes that remove barriers to growth.

The business community has a long shopping list of what it wants, starting with changes in the cabinet, and we will have to see what eventually happens on that score.

We will also have to see whether the practical difficulties of moving high-level staff into Britain can be tackled.

I was talking the other day with someone from one of our large consultancies who told me that he could cite specific instances where foreign enterprises were locating in Switzerland and Singapore because it was easier to get visas for staff to move there.

Clearly government is not as joined up as it should be. But within the Chancellor's scope there are detailed changes to tax and other issues that need tweaking. And that is what he should do.

PROMOTED VIDEO
Arts and Entertainment
musicBand's first new record for 20 years has some tough acts to follow
News
peopleAt least it's for a worthwhile cause
Voices
A new app has been launched that enables people to have a cuddle from a stranger
voicesMaybe the new app will make it more normal to reach out to strangers
News
Liam Payne has attacked the media for reporting his tweet of support to Willie Robertson and the subsequent backlash from fans
peopleBut One Direction star insists he is not homophobic
Life and Style
healthFor Pure-O OCD sufferers this is a reality they live in
Life and Style
Sexual health charities have campaigned for the kits to be regulated
healthAmerican woman who did tells parents there is 'nothing to be afraid of'
News
ebooksAn unforgettable anthology of contemporary reportage
Latest stories from i100
Have you tried new the Independent Digital Edition apps?
Independent Dating
and  

By clicking 'Search' you
are agreeing to our
Terms of Use.

iJobs Job Widget
iJobs Money & Business

Trainee / Experienced Recruitment Consultants

£20000 - £25000 per annum + OTE £40,000: SThree: SThree are a global FTSE 250 ...

Trainee Recruitment Consultant - Soho

£20000 - £25000 per annum + OTE £40000: SThree: As a Recruitment Consultant, y...

Trainee Recruitment Consultants - Banking & Finance

£20000 - £25000 per annum + OTE £40,000: SThree: SThree Group have been well e...

Quantitative Risk Manager

Up to £80000: Saxton Leigh: My client, a large commodities broker, is looking ...

Day In a Page

A roller-coaster tale from the 'voice of a generation'

Not That Kind of Girl:

A roller-coaster tale from 'voice of a generation' Lena Dunham
London is not bedlam or a cradle of vice. In fact it, as much as anywhere, deserves independence

London is not bedlam or a cradle of vice

In fact it, as much as anywhere, deserves independence
Vivienne Westwood 'didn’t want' relationship with Malcolm McLaren

Vivienne Westwood 'didn’t want' relationship with McLaren

Designer 'felt pressured' into going out with Sex Pistols manager
Jourdan Dunn: Model mother

Model mother

Jordan Dunn became one of the best-paid models in the world
Apple still coolest brand – despite U2 PR disaster

Apple still the coolest brand

Despite PR disaster of free U2 album
Scottish referendum: The Yes vote was the love that dared speak its name, but it was not to be

Despite the result, this is the end of the status quo

Boyd Tonkin on the fall-out from the Scottish referendum
Manolo Blahnik: The high priest of heels talks flats, Englishness, and why he loves Mary Beard

Manolo Blahnik: Flats, Englishness, and Mary Beard

The shoe designer who has been dubbed 'the patron saint of the stiletto'
The Beatles biographer reveals exclusive original manuscripts of some of the best pop songs ever written

Scrambled eggs and LSD

Behind The Beatles' lyrics - thanks to Hunter Davis's original manuscript copies
'Normcore' fashion: Blending in is the new standing out in latest catwalk non-trend

'Normcore': Blending in is the new standing out

Just when fashion was in grave danger of running out of trends, it only went and invented the non-trend. Rebecca Gonsalves investigates
Dance’s new leading ladies fight back: How female vocalists are now writing their own hits

New leading ladies of dance fight back

How female vocalists are now writing their own hits
Mystery of the Ground Zero wedding photo

A shot in the dark

Mystery of the wedding photo from Ground Zero
His life, the universe and everything

His life, the universe and everything

New biography sheds light on comic genius of Douglas Adams
Save us from small screen superheroes

Save us from small screen superheroes

Shows like Agents of S.H.I.E.L.D are little more than marketing tools
Reach for the skies

Reach for the skies

From pools to football pitches, rooftop living is looking up
These are the 12 best hotel spas in the UK

12 best hotel spas in the UK

Some hotels go all out on facilities; others stand out for the sheer quality of treatments