The Pre-Budget Report (From the archive)

 

All the talk is that Alistair Darling will spend heavily in the Pre Budget Report to try to give a boost to the economy and take some of the edge off the coming recession. So tax cuts and benefit spending will be the order of the day. But is this wise and will it work? I don’t think so.  

Many say that the President Bush tax rebates of 2001 showed that a weakening economy can be stimulated this way. But the difference this time is that the bubble of personal debt is so much bigger. In the USA, President Bush tried giving tax rebates this year, but the money is not being spent, but rather saved or used to pay off debt, so there is no stimulus there. The increased borrowing to pay for the rebates will come back later in tax rises.

If Alistair Darling is going to bet the shop on tax cuts and benefit increases, he runs the risk of building up even greater future UK tax rises for no immediate gain. We have already seen a potentially large stimulus to the economy from unprecedented interest rate cuts, yet the Government wants a giveaway budget without seeing if they work. This is politics rather than economics and the latest news is a slimmed down Queen’s Speech. Gordon Brown is opening up the option to “cut and run” for a General Election before the full severity of the recession bites. 

At the time of the Budget, I argued that we needed low interest rates and lower taxes and I attacked Government plans to increase tax and abolish the 10p income tax rate (Hansard 13/3/08 col 488).

Since then the economic outlook has deteriorated sharply. At that time the Treasury predicted growth in the economy next year of 2.5 per cent, now independent forecasters expect it to fall by 0.9 per cent. Inflation is down as demand for commodities falls. Unemployment is predicted to double with long term unemployment likely to quadruple.

Government borrowing is going to soar, not only because of changes to compensate for the loss of the 10p rate and further fiscal measures, but tax receipts are below forecast levels and benefit bills will rise in line with higher unemployment and as they are linked to September’s RPI of 5 per cent. The Institute for Fiscal Studies (IFS) predicts borrowing this year almost 50 per cent higher than forecast at Budget time.

As the IFS has stated, “the underlying level of debt was already perilously close to the Government’s ceiling. Mr Brown did not leave his successor… with the fiscal room to cope…”

A political Pre Budget Report followed by an Election in the Spring is a gamble, but Gordon Brown knows that as the recession takes hold, his past will come back to haunt him – an end to boom and bust? Not yet.

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