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We now know why the Prime
Minister chose not to go to the country early. The economic and financial
position has worsened such that it would now only be possible to give some
significant pre-election sweeteners by raising the already high borrowing
numbers still more and hence endangering the government’s reputation for fiscal
prudence.
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In the event, the Pre-Budget
Report (PBR) reflected a keen political judgment in partially adopting the
Conservatives’ tax proposals while appearing to direct extra money at the margin
into spending on health and education
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Overall, the PBR was pretty much
fiscally neutral, giving away small amounts for the next two years (mainly on
inheritance tax measures) and raising it in the next two (mainly through the end
of capital gains tax taper relief and the reform of non-domicile taxation).
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The Chancellor’s acknowledgement
of the darker economic outlook is marginal. He reduced the forecast for growth
next year to 2% to 2½%. We are forecasting 2% – but the outturn could easily be
much worse than our forecast. Moreover, it is noteworthy that the official
forecast envisages growth rebounding to a higher level than previously forecast
in 2009/10.
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It is this which explains how,
after raising his borrowing numbers for next year by £6bn, borrowing is pretty
much back to the previous track within three years.
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We suspect that, without
significant further tax rises, borrowing will turn out to be nearly £10bn higher
than the official forecast for 2009/10 and by 2011/12 it may still be standing
close to £40bn.
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Furthermore, this reflects a
central forecast, yet economic risks are now firmly skewed to the downside.
Moreover, given this, and the clear chance that government spending will not
slow as much as the Treasury’s plans envisage, the risks to borrowing are skewed
to the upside.
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Mr Darling’s first PBR was a
workmanlike performance without the bravura of his predecessor. But economic
circumstances are much less favourable for him. And they may well get less
favourable still. As always, Chancellors can only achieve what the economy
allows. We may be entering a new period of hard problems and hard choices.
