“Everybody’s expenditure is somebody else’s income.” This statement of the
staggeringly obvious underpinned Alistair Darling’s pre-Budget report (PBR) or,
as it was more accurately described by some, the Chancellor’s emergency budget.
It has been variously interpreted as the death of New Labour or the return of
Keynesian economics, but the PBR seemed far more prosaic and pragmatic. There is
a hole in the economy where the private sector used to be, and the various
measures Darling announced are an attempt to get households and businesses
spending again, as well as stepping up government spending.
Too much of the subsequent comment focused on how the tax changes will be
financed, the steep rise in borrowing and the jump in the ratio of public sector
net debt to GDP. Government finances, already in the red, will deteriorate
further and a borrowing figure of £118bn is projected for 2009-10 topping
£100bn for the first time. Gordon Brown had reduced the figure to 30% of GDP and
wanted to keep it at a ‘sustainable’ share of 40%. But it now looks like rising
to 57.4% by 2013-14, higher even than in the dark days of the Callaghan
government. And these forecasts hail from a Treasury with a track record for
optimism on public sector finances.
If not dead, ‘prudence’ is taking a very long holiday. Brown’s golden rules
are now totally irrelevant and the claim that boom-and-bust cycles have been
consigned to the history books looks a bit premature. But none of this means
Darling’s PBR got it wrong. The worst that might be said is that, if he intended
loosening fiscal policy, he really should not have started from here. His
problem was his inheritance, hardly a robust one. He, nevertheless, still needed
to respond decisively to what will almost certainly be confirmed a recession by
the time you read this.
Respond he did. In some ways he was very modest, given the scale of the
problems. The housing market is still sliding south, the cries of anguish from
the high street are getting louder, the car industry wants government help and
the much-watched Purchasing Managers’ Index surveys in manufacturing, services
and construction have all recorded their lowest-ever readings. As unemployment
rises and the impact of the credit crunch is now being felt by households and
small businesses, the Chancellor had to point the way to recovery.
Spread over two fiscal years, it is estimated he will inject the equivalent
of 1% of GDP into the economy, not enough to prevent a recession or a very tough
2009. But, taken in conjunction with other initiatives, the PBR should minimise
its length and depth. The effectiveness of individual measures, such as the
reduction of VAT to 15%, can be debated. But direction of policy was essential.
As consumers retrench, leading businesses to cut back, a stimulus from the
public sector is essential. The impact on public finances, moreover, is not as
draconian as some parts of the media claim. If net debt does rise to 57.4%, it
will still be lower than Germany’s, France’s and the US’s today, less than half
of Italy’s and one-third of Japan’s. Some of it is to be repaid by the banks
and, given low interest rates, the debt is affordable.
On its own, the PBR will not bring forward the date of an upturn by very
much. But this looser fiscal policy will complement the looser money policy
already in place. It means all available policy levers are now being pulled at
the same time. The MPC decision to reduce Bank Rate to 3% last November was
worth £45 each month in disposable income for every £50,000 of debt (assuming
the rate cuts were passed on) and the Committee cut it by a further percentage
point on 4 December to 2.0%, its lowest level since 1951.
But despite upsetting those holidaying abroad, the recent slide in sterling
is a plus for the economy. There is a need to re-balance activity, with more
exports required instead of consumption. In a slowing global economy, British
firms need an edge and the weaker sterling will help them look more competitive
to foreign buyers.
Anyone still doubting the authorities’ actions should look back to September
1992. Once the UK was humiliatingly dumped out of the ERM, interest rates fell
from double-digit rates and sterling settled at a much lower level, while
Chancellor Norman Lamont had already stepped up public sector spending. This
combination of actions quickly led to the end of the recession and ushered us
into a 16-year period of growth. Today, the Treasury, MPC and the currency
market have adopted the same package of measures, even earlier in the cycle.
The Major government, hamstrung by ERM membership, was not free to act before
the debacle of 16 September 1992. Today, however, the necessary steps were taken
before the UK was officially announced to be in recession, which is why the
downturn should be a ‘V’ shape, rather than a ‘U’ or even an ‘L’. Darling’s PBR
should not be seen in isolation but as part of concerted attempt to get the
economy moving again.