Wednesday, March 12, 2008
Making the best of a bad job
Posted by David Smith at 03:30 PM


From the moment Alistair Darling stood up, the aim was clear, to offer solidity in uncertain times, reassurance amid the turbulence, and not do anything to make a difficult situation worse.

Did he pull it off? The message of his new forecast, and indeed a large chunk of the speech, was that Britain is doing better than her peers. This was the context in which he took a scalpel to his growth forecast, trimming this year by a quarter to 1.75%-2.25%, and next year by another quarter to 2.25%-2.75%.

So, while Darling has revised his numbers down for a second successive time, the UK still looks relatively successful against expected G7 growth of just 1.5% this year, 2% next. The Treasury is actually quite upbeat about the wider world, expecting China, India and the rest to give us 4% global growth this year, not that much down on 2007’s 4.75%. All these growth numbers, of course, may be Panglossian in their optimism.

Some of the Treasury’s concerns appear deep inside the budget documents. How serious is the risk of a housing and consumer recession? “Conditions are in place for house prices to slow without a significant negative impact on consumption,” officials say, before adding the caveat: “Nevertheless, there remains the risk that, combined with the broader tightening of credit conditions caused by the disruption in global financial markets, consumer spending could slow more than forecast.”

This was not the time, however, for Darling to spread the alarm by being more downbeat than necessary, so the public view is that this is a temprary downturn.

If the growth slowdown is a blip then so, in Darling’s view, is higher inflation. Unusually, the Treasury is predicting above-target inflation for the end of the year, 2.5%, but with a return to 2% next year.

Most of the nasties in the budget forecast relate to Britain’s twin deficits. Public sector net borrowing is revised up by £14 billion over two years - from £36 billion to £43 billion in 2008-9 and from £31 billion to £38 billion in 2009-10. I suspect we have not seen the last of the upward revisions to these numbers.

This is despite the fact that, in net terms, the budget was a modest revenue raiser. Sensibly, Darling left well alone in the coming year - postponing the fuel duty hike and giving extra fuel help to pensioners resulted in a net “giveaway” of £140m, after other tax hikes are taken into account. In 2009-10 and 2010-11 the budget raises £790m and £1.9 billion respectively, with higher alcohol duties and new green taxes on cars mainly responsible. The message now appears to be that you shouldn’t drink or drive.

There was also a bit of a horror in the balance of payments numbers, highlighted by David Cameron in his response. The current account deficit is put at £72.5 billion this year; the Treasury’s guess being that it topped £70 billion in 2007. That is a lot of red ink.

Was Cameron right to describe the budget as detached from reality? Maybe. If the credit crisis is as bad as some fear, Darling have to have to abandon his scalpel and instead take an axe to his forecasts. But if he does, he thinks he now has an alibi in “events” outside Britain’s control. And for this week at least, he probably made the best of a bad job.

This piece also appears on Times Online