Sunday, March 09, 2008
Can Darling bury his bad news?
Posted by David Smith at 09:00 AM
Category: David Smith's other articles


Ties say a lot about a man. If you are feeling down you pick out the dullest one from the wardrobe, hoping nobody notices you. When you are bursting with confidence, on the other hand, the more garish and flamboyant the better.

So what should we make of the fact that, flanking Gordon Brown at prime minister's questions last week, Alistair Darling was wearing a particularly bold, striped number? Is the chancellor, emboldened by having got away politically with the nationalisation of Northern Rock, overflowing with confidence? Can he pass on any of it to the rest of us?

Brown, even when announcing big increases in borrowing, usually conveyed the impression the economy was in safe hands. It may be because budgets are in spring, a time of hope and renewal, but when successful chancellors sit down the world somehow seems a more optimistic place.

That will not be easy for Darling this week, but not impossible. The budget starts with the outlook for the economy and the public finances. In October, in his first pre-budget report, he lopped half a point off the Treasury's growth forecast for 2008, establishing 2% to 2.5% as the new range.

Even that now looks ambitious. Each month the Treasury puts together a compilation of independent forecasts. The average of new forecasts is just 1.7%, which would make this the weakest year since 1992. The Bank of England has revised down its forecast since November.

Does Darling tough it out, or take the political flak from another downward revision on the chin? As importantly, can he leave the Treasury's growth forecast for 2009 a speedy return to trend growth of 2.5% to 3% unaltered?

He can blame the rest of the world: the Organisation for Economic Co-operation and Development is revising down its forecast for advanced countries' growth this year to below 2%. Britain, though, is holding up. Consumer spending is at best mixed and the housing market weak, but purchasing managers' surveys for manufacturing and services reliable indicators are up. The way the numbers work, a solid first quarter would make 2% growth this year achievable, though at a stretch.

So, given that one aim of the budget is to instil confidence, expect a downward revision to growth but only to a limited extent. What about the public finances? Strong January tax receipts have eased pressure to revise up the public borrowing figures significantly. But the chancellor needs the economic downturn to be short-lived to prevent some scary borrowing figures.

Darling can for now leave the 100 billion or so of Northern Rock debt off the government's books, though it is only a matter of time before the Office for National Statistics revises its figures and he will be forced to do so. The ONS suggests it will add the equivalent of at least 6.7% of gross domestic product to government debt, currently 35.9% of GDP, taking it above the official 40% ceiling.

He will also have something specific to say about housing. As he foreshadowed in a speech last month, the Treasury plans a new "gold standard" for mortgage-backed securities, intended to unfreeze the market and get funds flowing again. There may be other action directed at housing. A housing slowdown is welcome, but Darling, having insisted the UK market is in much better shape than America's, does not want anything worse.

Many businesses, it should be said, are less interested in the big budget picture than the finer detail, covering everything from the taxation of foreign dividends to a proposed Revenue clampdown on so-called "income shifting" between husbands and wives in small businesses. There remain concerns about Darling's proposed changes to the taxation of "non-doms" and capital gains.

The Treasury's line is that those concessions are about all business should expect. Though officials maintain they remain committed to consulting with business on tax changes, Darling will have to work hard to undo the damage of last October's pre-budget report.

As Paul Davies at Ernst & Young, the accountant, puts it: "It's not too late, but the chancellor has a long way to go if he's going to inspire confidence in the eyes of UK businesses."

Darling will make much of the drop in the main rate of corporation tax from 30% to 28% in April, one of 30 changes left by his predecessor, though rather less about the rise in the small companies rate. In April, too, the basic rate of income tax will drop to 20%, though the 10% starting rate will also disappear.

There will be a green element to the budget. The chancellor has already announced that a new "per plane" aviation duty will be introduced next year, replacing the existing air-passenger duty. He will act on the recommendations of Julia King of Aston University on low-carbon cars.

This is intended to push manufacturers into reducing CO2 emissions by up to 30% using existing technology. There will be measures to help this along, though Brown's last budget included a rise in vehicle excise duty on high-emitting Band G cars to 400 from next month. Deferring the 2p-a-litre April rise in petrol duty, which will push a gallon closer to 5, would be popular with motorists but go down like a lead balloon with the green lobby.

The chancellor also has the tricky task of steering through the minefield of alcohol taxation. As a Scot, does he end the freeze on duty on whisky and other spirits and hit middle-class wine imbibers in the hope of deterring a few teenage binge drinkers? There have been suggestions that he might, but Treasury signals, as always, are hard to read.

These details and others are interesting and important, so the call by Richard Lambert of the CBI for a six-paragraph budget that does nothing will fall on deaf ears. Even beleaguered chancellors do not pass up on their big moment.

It would be nice if the chancellor took up another idea, the 2-plus-2 rule suggested by the Institute of Directors, of marrying the 2% inflation target with a permanent 2% limit on the annual real growth of public spending. Over time, the IoD says, this would cut public spending from 42% to 35% of GDP and free up resources for lower taxes. I suspect, though, shorter-term considerations will prevail this week.

PS: With oil hitting $105 a barrel, inflationary pressures are a global problem. China's premier, Wen Jiabao, told the National People's Congress last week rising prices were a big concern and the authorities would sacrifice some growth to deal with them. The official growth target this year is cut to 8%, compared with the 11.4% expansion last year.

Forecasters expect a slowing of China's growth but not that much, looking for about 10%. The statistics, however, often come into line with the official policy aim.

Do inflation and rising wage pressures pose a fundamental threat to China's long-run prospects? Not according to Price Waterhouse Coopers, the accountant, in a new set of "World in 2050" projections.

China, it says, will grow by an average of 6.8% a year in real dollar terms between now and 2050, though it won't be the fastest- growing "E7" China, India, Brazil, Russia, Indonesia, Mexico and Turkey economy. That honour goes to India, with 8.5% annual growth. Among bigger emerging economies, Vietnam is favoured most, with growth put at 9.8% a year for the next four decades.

China's economy, at present less than a quarter of America's at market exchange rates, will by 2050 be 30% bigger, and nine times Britain's economy. India will be smaller than the US but seven times the size of Britain. We will still be richer; per capita incomes here will be twice those in China by the middle of the century but with the gap closing fast. At market rates, UK incomes are now 17 times those in the People's Republic.

From The Sunday Times, March 9 2008