On a tight Budget
Inside Politics – The Policy Exchange newsletter (London), 7 March 2008
The Budget comes at a time when there are dark clouds on the economic horizon – a contrast to the sunny days when Gordon Brown, as Chancellor, would eulogise over his part in producing unprecedented periods of continuous economic growth. This makes it almost impossible for Alistair Darling to pledge a few extra billion pounds for education, health or the environment. In any case, even when Mr Brown used to do this, he often recycled promises.
The public finances are in an extraordinary condition. After 15 years of economic growth, the budget should be showing a healthy surplus. After all, prudent managers regularly set aside a stash of money to deal with unexpected changes of circumstances. The Government would have been well advised to do likewise. It has done the very opposite.
The budget deficit is currently around three per cent of GDP – at a time when the economy is still growing moderately. This alone would be unpleasant, if not yet catastrophic. But there are reasons to fear that things might get worse in the next couple of years. Much of the UK’s previous growth record depended on a buoyant housing market and the availability of cheap credit. The fallout from the US subprime crisis has brought an abrupt end to both these conditions. Add to that the risks posed by a recession across the Atlantic as well as rising energy, food and commodity prices and you have a potentially poisonous cocktail for the economy. The hard-to-quantify dangers around Northern Rock add to the Treasury’s troubles.
Given all these circumstances, the chances of a downturn in the UK’s economic performance are quite high. So far, few analysts are predicting a recession. But it would take less than a full-blown contraction in the economy to leave the state’s finances in disarray.
For all of this, there is no leeway for any kind of fiscal stimulus that would help the economy avoid harsh times. It is not even clear whether the scheduled real spending increases of two per cent per annum until 2010 are achievable without tax increases. So in this sense, one cannot and should not expect too much from the Budget. It will most likely be a tight, boring Budget – a Budget for difficult times.