Some names are hopelessly misleading. "Pre-Budget report" sounds like it belongs in some dull accountancy textbook. But make no mistake, the fiscal package unveiled by the Chancellor of the Exchequer in the House of Commons yesterday under that insipid name was a colossal and highly risky piece of economic engineering. The implications are anything but dull, for upon it hang the economic future of this country – and, quite probably, the shape of the next government.
There is economic logic behind the measures outlined by Alistair Darling yesterday. A strong case has been made for injecting money into the economy in the form of tax cuts, especially as the impact of recent rate cuts has been so reduced by the banking crisis. There is no magic bullet for recovery. Nothing ministers can do will return our economy to growth in short order. But the Government is justified in its attempt to soften the impact of the downturn and to restore some badly-needed consumer confidence through some form of fiscal stimulus.
The question is whether what was announced yesterday will boost the economy or whether it is, ultimately, just huge sums of public money down the drain. Some question the efficiency of the Government's big weapon: a temporary 2.5 percentage-point cut inVAT. They wonder whether the reduction is enough to entice people back into the shops, given the huge savings already on offer. The truth is that it is impossible to know. But it makes sense to target spending, rather than hand over all the money to people who are likely to use it to pay off their debts.
Yesterday's report was presented as an economic rescue package – and some of the figures were pretty terrifying, highlighting the desperate state of the British economy. But it also had heavy political content. Mr Darling, influenced by his boss, Gordon Brown, clearly set out to crush the political opposition, as well as the prospect of a prolonged slump. The Tory idea of a VAT holiday for businesses and the Liberal Democrat proposal for higher taxes on the wealthy were cunningly co-opted to make it more difficult for opposition parties to criticise the package.
This might have been cunning. But it was not necessarily wise. The problem is that the political calculation was so obvious, as so often with Mr Brown's machinations. It is impossible to see the proposed 45p tax rate for earners on more than £150,000 a year as much more than a political gesture, designed to set out dividing lines with the Tories. There is nothing wrong with a highly redistributive approach to tax, but as a means to help balance the budget this measure makes little sense because the sums raised will be negligible by comparison with the gaping holes in the public finances. One would have thought that Mr Brown would have learnt from the 10p tax debacle that playing politics with budgets is a risky strategy. Evidently not.
As for the shadow Chancellor, George Osborne, he donned the mantle of Prudence yesterday to reiterate his party's doom-laden warnings about what this package will mean for Britain's finances. Mr Osborne says any stimulus must be paid for by cuts in expenditure. There is certainly a huge amount of waste in the public sector (as Mr Darling himself admitted through his promise to find an extra £5bn in public sector savings). But cutting this state waste is a longer-term project and it stretches credibility to offer this as a solution to the present crisis.
In his punchy speech, Mr Osborne was correct to warn about the ballooning levels of public borrowing. There is a very real risk that debt levels on this scale will scare off investors in Treasury bonds and thus necessitate a painful hike in the Bank of England's interest rates to attract them back. Then there is the psychology of the British public to consider. Are people likely to take confidence from the stimulus measures and spend, or will they look, in justified terror, at the projected size of the national debt over the next six years (57 per cent of GDP by 2014) and decide to save spare cash in anticipation of a swingeing tax bill in the near future?
There is another factor to consider here. In his March budget, Mr Darling forecast GDP growth next year of 2.5 per cent. Yesterday that had turned into a contraction of between 0.75 and 1.25 per cent of GDP. Such a drastic reversal raises questions of the Treasury's credibility both as an economic forecaster and a steward of the nation's finances. Investors will have cause to ask themselves whether this Government can be trusted.
Much depends on the market's reaction to the Chancellor's programme for getting the public finances back into reasonable health in the medium term. Mr Darling's announcement of a rise in National Insurance contributions from 2011 is certainly a necessary start. But it does not begin to show how all this borrowing will be paid for, nor does it give any signal of what a new set of fiscal rules will look like. There are all too many questions yet to be answered.
But one thing, at least, is becoming clearer: The political battleground for the next election has come into sharp focus and there are real divisions between the parties. The Tories seem to be intent on exploiting fears of tax rises to come while blaming the Prime Minister for his role in the economic nightmare. Labour, on the other hand, is presenting itself as the party of serious action in the face of recession, portraying the Tories as callous, laissez-faire dogmatists who only care about the rich.
It is impossible to say, at this stage, which argument will be received with more sympathy. Everything hinges on whether this fiscal package is judged to have achieved its aim, and the opposition's skill in avoiding the pitfalls that lie ahead. Whatever else, it is a gamble in a world where the economic news has become progressively more depressing. But now the roulette wheel is spinning. And the state of the British economy and the political landscape will depend on where the ball falls.Reuse content