It used to be said of Gordon Brown’s budget speeches that the devil was in the detail. While his speeches tended to be upbeat and positive, the bad news was buried in the technical papers that accompanied his statement. With Mr Darling, the devil is in the absence of detail. In his typically transparent style, the chancellor set out the Treasury’s view of the economy and the general steps to be taken to get government finances back on track. But it was only the general steps. Darling focused on the ends when more detail on the means was wanted.
Much of what he had to say in the Budget on 24 March had been trailed in his Pre-Budget Report last December, though the story was marginally more optimistic. Economic growth was tweaked a little: just 1.25 percent for 2010 rising, optimistically, to 3.25 percent in 2011 and then 3.5 percent in 2012. The growth profile shows a welcome rebalancing of activity, with inflation staying in the target range and unemployment peaking this year.
On the big number that interests markets, the chancellor reported modestly good news. Because of stronger-than-expected tax receipts and lower-than-expected benefit payments, the fiscal deficit of £166.5bn was around £11bn lower than his original forecast. It is still 11.8 percent of GDP, compared with the seven percent in 1976 that prompted a political crisis and a call to the International Monetary Fund.
Where the chancellor disappointed was in explaining how the deficit will be reduced, except in the broadest terms. This government, if it retains office, wants to halve the deficit in four years, with two-thirds of the contribution coming from spending cuts and the rest from tax increases. Since he had already announced substantial tax increases (national insurance, freezing of income tax bands and inheritance tax limits, plus income tax up to 50 percent and ending personal allowances for higher earners), his plans for spending reductions were eagerly awaited. Darling was not very forthcoming on Budget day, but later admitted that to reach his goal will require spending cuts deeper and tougher than Mrs Thatcher’s in the 1980s.
In the run-up to the General Election, something of a phoney war about the deficit has emerged between the major parties. While recognising the need to do something, nobody is brave enough to commit to specifics. In the background the rating agencies are hovering. UK debt is serviceable with interest rates at current levels, but a downgrade would push interest rates up and worsen the problem. Darling thinks prolonging the recession will lead to a downgrade and so will not make the spending cuts until recovery is well underway. This probably means not before 2011.
On the other hand, the size of the deficit is, in his Tory opposite number George Osborne’s view, the biggest risk to downgrade, so he would start cutting spending immediately. But he has not said by how much or where either.
Though dishonest, perhaps they are right not to commit to specifics. A single quarter of growth so far is not a lot on which to hang a recovery. Waiting for the Q1 GDP number just before election day – an important pointer to the pace of the upturn – is a sensible stance.
But there are also three big risks to a policy which focuses so heavily on cutting spending. First, the track record of governments, Labour and Conservative, of cutting spending on the scale thought necessary is not encouraging. Second, given the areas to be ringfenced (health, defence, social protection), the cuts may be in areas that matter to the economy’s longer-term health, such as infrastructure projects.
Finally, perhaps the politicians are posing the wrong question. Instead of asking how to reduce spending, they ought to ask how to generate economic activity. Faster income growth is another route to debt reduction, and so policy needs a business-friendly bias to stimulate output, employment, spending and p rofits. If this is the starting assumption, the answers will be rather different.
Dennis Turner is chief economist at HSBC
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