Sunday, April 19, 2009
Darling tries to climb out of a financial hole
Posted by David Smith at 09:00 AM
Category: David Smith's other articles


What does Alistair Darling do this Wednesday? The economy is in deep recession and the public finances are in a mess. He has as much room for manoeuvre as an elephant in a Mini.

He says he wants to be realistic with people about the problems the economy is facing but he has to make sure, in doing that, he does not drive the nation into a state of depression.

Darling is Britain’s crisis chancellor, having been only briefly at the Treasury helm before the storm broke in the summer of 2007. That adds to the challenge he faces this week. The budget needs to inject some confidence, but this will be an uphill task for a chancellor whom the public thinks of only as the bearer of bad news.

So what can we expect from Darling in a budget that will have as its key theme “investing in recovery”? At a time when the big story will be the government’s acknowledgement of the scale of the recession and the deterioration in Britain’s public finances, the details of the budget will seem almost superfluous.

We have become used to hundreds of billions of pounds of public money being thrown around or provided to prop up banks, but it is worth remembering that most budgets are modest affairs.

Gordon Brown’s last three budgets, in 2005, 2006 and 2007, were essentially exercises in moving the fiscal furniture, sometimes with disastrous consequences, as in the abolition of the 10p starting rate of income tax. In net terms, though, none raised or lowered taxes by more than a few hundred million pounds.

Darling’s only previous budget, in March last year, was a medium-term tax raiser but again the sums were fairly modest, building up to an annual £1.87 billion by 2010-11, mainly through higher duties on alcohol, cars and biofuels.

The mould was broken by last November’s prebudget report, with a net give-away of £9.3 billion in 2008-9 and £16.3 billion in 2009-10, followed by net tax increases of £4.8 billion and £7.6 billion respectively in the two following years.

This week, unless the signals are wrong, we are back to a “normal”, tinkering budget, even though times are far from normal. That will allow the chancellor to give some modest “targeted” help for the job market to promote the government’s green agenda and to boost investment in digital technology. There may be some help for savers, though not a general income-tax exemption on savings interest.

As for any tax-raising, at this stage the aim will be to make it painless. At times like these a drive against tax avoidance is always a failsafe and Darling will be hoping to extract revenues from the worldwide clampdown on tax havens.

I do not want to say much more about what might be unveiled this week because pre-budget speculation can be tiresome and we will know soon enough. Amid the drive to boost lending to businesses, however, there are some good ideas around.

BDO Stoy Hayward says that relaxing the restrictions and increasing tax relief on the Enterprise Investment Scheme and venture-capital trusts could steer much needed funds from investors to small and medium-sized firms.

There are, though, bigger fish to fry. How does Darling generate some optimism while slashing his growth forecast? What he will do, of course, is offer hope.

The Treasury’s new forecast, which is set to treble this year’s expected drop in gross domestic product from 0.75-1.25% in November to about 3.5% now, with 1% growth next year, remains consistent with an economic picture in which the worst is behind us. Thus, the two biggest quarterly falls in GDP should be the 1.6% decline in the final three months of last year and a further fall of about 1.5% in the first quarter of this year, for which we will get official figures on Friday.

Recent economic data are consistent with those falls gradually tapering off as the year progresses, to the point where GDP is flat by the final quarter.

But there are lessons from other countries. America’s biggest quarterly fall in GDP looks to have occurred in the last three months of 2008, an annualised 6.3% (equivalent to 1.6% in the way UK figures are presented), which should have been followed by a decline of 3%-4% in the first quarter.

But the chancellor can get away with a “bad now, better later” message which, unlike some of his previous efforts, would not be met with ridicule by independent economists. Most agree that as long as banking problems do not erupt again violently, the huge stimulus being thrown at the economy – record low interest rates, the pound’s devaluation, the banking bail-outs, lower oil prices and the global fiscal stimulus, will revive growth in time.

What about the public finances? Darling will concede that borrowing at £170-180 billion will be half as much again as the £118 billion for 2009-10 he predicted in the prebudget report. But, unlike independent economists who think it will remain at these higher levels for years, he is likely to say that it will peak soon and then fall.

This is one reason why the Treasury view appears to be that this is not the time for immediate surgery to cure the public finances. If you are a believer in what economists know as “Ricardian equivalence”, after the great British economist David Ricardo, then it makes no difference whether the government announces tax hikes and spending cuts now or later – the mere existence of big borrowing numbers will make people and businesses rein back their spending. The chancellor will set out some medium-term “fiscal consolidation” measures though he probably does not expect to be around to implement them.

George Osborne is, however, sensibly starting to prepare the ground for the spending cuts that will be necessary, last week describing even the government’s 1.1% a year planned rises in spending as “not sustainable”.

This week’s budget, in most important respects, will be a holding operation. The really memorable ones will come later. And they won’t be very pleasant.

PS: I think I have discovered where Sir Fred Goodwin is hiding – page 156 of Vince Cable’s new book, The Storm, where his name has been cunningly changed to Sir Frank Godwin. The curse of the proofreader has struck the Liberal Democrat shadow chancellor. On that same page, Bob Diamond of Barclays might have something to say about being described as being as big a threat to stability as Arthur Scargill.

Talking of the former RBS chief executive, it has been pointed out to me that a Fred Goodwin was among the passengers who went down with the Titanic. No further comment required.

Cable’s book, written “in some haste”, is a serviceable account of the crisis based largely on news reports. Nobody familiar with his many interviews will be surprised by its content.

It raises the question of whether it is possible for opposition politicians, away from the decision-making process, to write really memorable books. Many actual chancellors have put pen to paper with good effect. Denis Healey’s The Time of My Life is my favourite political autobiography, while Nigel Lawson’s The View From No11 is the best account of running the Treasury.

James Callaghan’s Time and Chance, where he recounts sitting in the Treasury watching the reserves slip away, and Norman Lamont’s In Office, which includes the ERM (exchange rate mechanism) crisis, are worthy of note.

Since then, silence. Kenneth Clarke did not use his period in the Tory wilderness to put pen to paper. Gordon Brown has, but about other things, and I can’t say I’d relish 1,000 pages from him. So let’s hope Darling is keeping a diary.

From The Sunday Times, April 19 2009