Page last updated at 17:26 GMT, Sunday, 21 March 2010

Budget 2010: Alistair Darling's election Budget

ANALYSIS
By Stephanie Flanders
Economics editor, BBC News

This looks set to be the 'no-giveaway' budget'.

The chancellor won't be announcing big pre-election giveaways - and he won't be giving much away about the shape of future spending cuts.

Chancellor's red box
Nothing to give away here...

You could say that expectations have been set even lower than usual. But there are still two key tasks that Alistair Darling will want his budget to fulfil.

The first is to show voters that Labour has a plan to get the economy through - and that he's a chancellor who sticks to his guns. The second is to show investors in the market that another Labour victory might not be as scary as they seem to think.

Payback time

Government net borrowing is at an all-time high, at more than 12% of GDP. For nearly a year, Mr Darling has kept to the mantra that he will halve that number by 2014-15.

How will that be achieved? According to the plans laid down in the December pre-Budget Report (PBR), that means a total reduction in borrowing of £82bn over that period. About £38bn of that will come from spending cuts, £19bn from tax rises that have already been announced, and about £25bn will come from growth.

Budget deficit

Numerous outside bodies - from the International Monetary Fund to the OECD and the European Commission - have said his plan lacks credibility. They would like to see a faster timetable for cutting borrowing, with more detail on how, precisely, he would get from here to there. So does the Governor of the Bank of England, Mervyn King.

But don't expect the chancellor to provide these things in this week's Budget.

The Treasury have made clear there will be no spending review of departmental budgets until the autumn. And there is little sign that he will strengthen the deficit target either, though the chancellor may wish to firm up his commitment to speed up the timetable, if the economy does better than the Treasury expects.

It's all about timing

The Conservatives have talked up the need to cut borrowing sooner, to avoid the risk to the economy posed by a potential crisis of confidence in the markets.

But, as the chancellor will no doubt point out, they have not set a precise target for cutting the deficit - all they say is that they would remove "the bulk" of the structural deficit "over the forecast horizon". It is not clear, either, what the forecast horizon is, though most assume it goes to 2015.

The shadow chancellor, George Osborne, has also seemed to waver on the question of whether there will be dramatic cuts in 2010. Against this political backdrop, Alistair Darling's implicit message to the critics will be "you may not like what I say, but at least I'm consistent."

Windfall spending?

Mr Darling may also have some good news to report. on the basis of the monthly public finance data, most city experts now expect the chancellor to announce that net borrowing in 2009-10 will be lower than forecast. In December he said it would be £178bn. Many now think it will be closer to £170bn. Economists at HSBC have even suggested it will be as low as £155bn.

With the election so close, it would be surprising if the chancellor did not take the opportunity to spend a part of this forecasting "windfall" on measures to help the jobless, particularly the £1bn or so that may be freed up by lower-than-predicted unemployment.

But the room for that kind of new spending is tightly constrained by the chancellor's other objective of reassuring the markets. Arguably, this is rather more important this time than it was in the December pre-Budget Report; because unlike then, many in the city now think it's possible that Labour could end up winning the most seats in the election.

Without a safety net

In the PBR, a modest improvement in the structural deficit forecasts was used to support higher spending in 2011 and 2012. Bond and currency traders didn't like it.

But there was only a muted effect on the pound and the price of UK government debt. The government took that as a sign of confidence. Some others took it as a sign that the traders did not expect Labour to be in power in 2011.

The chancellor no longer has that safety net. Traders and investors will be listening to every word - and the Conservatives will pounce on every market wobble as evidence that the government is putting the country's AAA credit rating at risk. For all these reasons, most expect Alistair Darling to put the majority of any "savings" into cutting government borrowing.

Arguably, a much tougher decision for the Treasury will be whether to revise down the forecast for growth in 2011.

The forecast in the PBR for growth of 1.25% in 2010 is now slightly below the city consensus, which is for growth of about 1.4%. But the Treasury prediction of 3.5% growth in 2011 is far above the consensus prediction of around 2.1%.

If Chancellor Darling revises down his forecast, he may win points for realism. But he would then come under pressure to show how he could still meet his borrowing targets in an environment of slower growth.

But, if he sticks to the more bullish forecasts, he has to explain how 3.5% growth squares with the government's campaign rhetoric about a "weak and fragile" recovery.

This may well be another area where the chancellor will not be giving much away.



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