Outlook: It's always dangerous to double-guess the Budget this close to the event. The proximity means that readers remember what you've said when confronted by a policy response which is the exact opposite to the one forecast, whereas, if you have made your predictions further out, you can always claim that they were right at the time but that events and politics intervened to make them redundant.
With these warnings ringing in my ears, here goes anyway. The Governor of the Bank of England, Mervyn King, has made it pretty plain that he does not want to see another fiscal stimulus of the type announced in last November's pre-Budget report (PBR). In his view, the fiscal deficit is already high enough. Anything further might undermine international confidence in the British economy and the Bank's efforts to restimulate activity through monetary policy.
Yet in making these observations to MPs on the Treasury Select Committee three weeks ago, the Governor added an important rider. He didn't want to rule out "targeted and selected measures" in the labour or corporate credit markets that might do some good in helping to underpin confidence in the economy.
The Chancellor, Alistair Darling, will broadly stick to that script. He's said that he wants to support the economy through the recession. Unfortunately, the further marked deterioration in the public finances since the PBR gives him only limited discretion in the matter. It would be hard to impossible for him to sell another 2 per cent fiscal stimulus to the City.
Yet a more limited stimulus of targeted measures looks more than feasible, and would arguably put the public finances in a rather better position in the medium term than donning the hair shirt and imposing a period of austerity. In recent weeks, there have been some clear-cut signs of the recession bottoming out.
The inventory adjustment which caused the larger part of the economic contraction of the last two quarters now seems to be largely over. We have to assume so, in any case. If de-stocking carried on at recent precipitous rates, there would be no stocks left in the country at all by the end of next year. The shops would be empty and economic activity would be reduced to a bygone age where goods are purchased straight from the production line.
If destocking is over, that in itself might cause growth to rebound quite sharply over the months ahead. The danger from here on in comes rather from the still fragile nature of domestic demand. Contrary to popular belief, this hasn't yet been too badly affected, and certainly against industrial production, it is holding up remarkably well.
So whatever the Chancellor does, it is essential he avoids upsetting this precious commodity. Growing job insecurity and for many still heavy levels of indebtedness make a further, marked deterioration in consumer confidence all too possible. The last thing the Chancellor wants at this stage in the cycle is for people to give up spending and start saving. That would only accentuate the downturn.
The Government thus finds itself on the horns of a dilemma. It must set out a credible medium-term plan for restoring health to the public finances, but at the same time this cannot look so draconian that it undermines people's confidence in their spending power and job security. If it does either of these things, then all those green shoots of economic spring will be snuffed out in a double-dip recession.
The extraordinarily rapid deterioration in the public finances we've seen to date certainly hasn't been helped by the Government's profligacy and lack of foresight, but it is mainly down to a sudden collapse in tax revenues and particularly once-buoyant levels of taxation from the financial services industry. The cash cow of the City has all but disappeared.
Frankly, this underlying cyclical and structural deterioration is already so serious that the odd targeted measure – car scrappage, wage subsidy and so on – is going to make very little difference to the overall picture.
As I say, what's much more important than a billion here, a billion there added to the already groaning size of the national debt – governments can borrow an awful lot of money before they bust the bank – is to make people feel secure in their jobs and their homes so that we don't get the multiplier effect of excessive saving creating a second round of economic damage once the inventory adjustment has run its course.
Three and a half million unemployed is going to create a lot more problems for the public finances than a few relatively low-cost measures to help keep people in their jobs. It's all about confidence. The Chancellor must make sure he does as little as possible to damage it.Reuse content