TO THE relief of business and the eternal thanks of a grateful nation, Chancellor Alistair Darling could do us all a favour a week tomorrow: deliver the shortest Budget in living memory.
No pyrotechnics, no theatricals, stunts or rabbits out of hats: a plain statement to the effect that the tax changes proposed in November have been put on ice and that no further amendments to the tax system will be made until later in the year when
the nature and extent of the downturn in the global and UK economy are better known. Changes can then be made with greater confidence in their appropriateness and effect.
For neither he, nor the markets, know how much further the credit crisis has to run or how the slowdown will impact. No-one knows whether it is going to be a "U" shaped downturn, or, a "W" or a long and miserable "L". But it is not looking good. And in these circumstances the capacity for a fiscal change to make matters worse is more than considerable: it is a near certainty.
When in doubt, do nothing. Exactly this advice has been proffered by Richard Lambert, the Confederation of British Industry director general. In fact, he has even crafted a Budget speech of just six short paragraphs. What a refreshing break this would make from the ten-year chancellorship of Gordon Brown: a decade of Budgets of prolonged and relentless fiscal drizzle, many of the nastier pins and needles obscured from view until unearthed days later in some inconsequential-seeming explanatory annexe.
Sadly, however, the option of doing little or nothing is not this government's way.
It – and we – lose sight of the big strategic calls in the scramble for a gimmick – or in the case of next week, two gimmicks – that offer immediate news coverage and some minuscule, tactical advantage for the government.
All the fruits of the strong growth of recent years in rising tax revenues have been spent. The Budget overall is likely to be neutral as a rising Budget deficit rules out scope for any loosening to support economic growth. In fact, after a prolonged period of strong growth in government spending – 4.4 per cent a year in real, after-inflation terms – we are entering a period that will see that spending throttled down to just 1.8 per cent (see chart). Yet even with this spending slowdown, the Budget deficit continues to rise, as tax revenues are unlikely to grow by as much as hoped.
The bigger background also counsels caution. Barely a day now passes without some dismal confirmation of recession in America and slowdown in Europe. If just half of the gloomier warnings about the state of the US economy prove true, many companies here will be in danger.Even in China and India, two of the world's emerging economic powerhouses, factory activity is slowing. Central bankers across the world are caught between clear evidence of rapidly slowing growth and an unmistakable rise in inflation as commodity prices boom. In the UK, manufacturers are raising prices at the fastest rate since at least 1999. Little wonder the MPC is likely to bring rates down only gradually over the next six months.
One item of good news for the Chancellor is that the Budget deficit is now likely to be less bad than feared at £36.5 billion or 2.6 per cent of GDP. However, this compares with £30bn this time last year and a forecast of £34bn in the spring 2007 Budget – the sixth year in seven that the fiscal Budget has topped the forecast.
What is worrying is that the Budget deficit is still rising despite higher tax revenue from the stronger-than-expected performance of the UK economy in the second half of last year. If the public finances are deteriorating when the economy is growing by more than expected, how much worse will it be when it slows to 1.7 per cent this year?
Making good this shortfall by spending reductions looks tricky given the existing constraints on spending. Any further squeeze would be politically high risk. Indeed, the combination of slowing growth, persistent inflation and rising fiscal deficit looks similar to the toxic combination that dispatched previous Labour governments of 1929-31, 45-51, 64-70 and 74-79.
One diversion is likely to be a fuel poverty scheme in the absence of a windfall tax on the energy utilities. Another will be higher duty on alcohol, under the camouflage of health and social benefit. Raising beer, wine and cider duties in line with inflation would bring in an extra £175 million in year one, with a similar adjustment in spirits duties bringing in an additional £15 million. Presented as an adjustment for our own well-being, don't be surprised if the Chancellor, thinking of our own welfare of course, reaches for a larger measure.
The full article contains 826 words and appears in The Scotsman newspaper.
