It is hard to recall a time when Treasury sources have so copiously leaked the contents of a Budget as they have in recent days. At the same time, it is not hard to figure out why this has gone on, presumably with Gordon's Brown's blessing. Clearly, the Prime Minister's strategy has been to advertise the idea that he and Alistair Darling are undertaking big, bold measures to restore the nation's finances – even before the measures themselves have been unveiled.
Bold would appear to be the operative word. Leading off with a sharp cut in VAT by up to 2.5 per cent, the total size of the package of tax cuts will probably account for as much as 2 per cent of GDP. As tax revenues are falling, the chasm that this opens up will have to be met by borrowing on an eye-watering scale. About £20bn or £30bn will thus be added to the national debt next year. Mr Brown's strategy is not only bold – no one disputes that – but risky, as David Cameron's Conservatives have pointed out.
Everything is predicated on the idea that if sufficient quantities of cash are pumped into the system, dry rivers will flow and barren lands again yield fruit. In other words, consumers will feel cash-rich again and spend their money, while rising consumption eases the gummed-up flow of credit. Time alone will reveal the wisdom of these calculations but, whatever the doubts, we must earnestly hope they are correct.
The Chancellor is right to make a cut in VAT the centrepiece of his revival plan. True, the main beneficiaries will be the wealthy rather than the poor. Those seeking to buy expensive fast cars will profit more from a cut in VAT than, say, families struggling to pay high food bills. On the plus side, changes to VAT will have a more immediate effect on consumer confidence and spending than changes to tax credits, which take time to work through the system. The fact that VAT rates can be adjusted up or down relatively simply is also a good thing.
The Liberal Democrats, however, have been right to point out that at a time when government borrowing is set to impose huge strain on Britain's finances, everyone will end up shouldering the burden and taxes should be raised on the rich to help pay for the poor. There is no doubt, as even the Chancellor has admitted, that taxes will have to go up at some point to pay for the public spending. As the dole queues grow, those in jobs are going to feel the financial pressure resulting from this bailout. It also means the banks need to repay taxpayers' generosity by lending more money, more freely. Tasked with building up their capital, and with repaying the money they have received with interest, they must at the same time disburse a portion of that capital in accessible loans. A tough equation, but one they must square if they are not to reap a whirlwind of public ill will.
The Tories, meanwhile, are in an invidious position. Having demanded a more prudent approach to fixing the economy as it slumps into recession, they will be lonely voices calling for restraint amid this unprecedented giveaway.
The Tories have also to beware of appearing to hope that the Government's measures will fail, and of seeking to profit politically from our collective misfortune while, with some justification, reminding the electorate of the Prime Minister's culpability in our economic misfortunes.
Striking such a carefully nuanced position will demand all of Mr Cameron's skill between now and the next general election for, without doubt, the contents of today's Budget will be the terrain on which this contest is fought.Reuse content