Gordon Brown's economic options

Gordon Brown's lieutenants may come to regret blaming the loss of Crewe & Nantwich on voters' economic worries.

The truth is the government has very little scope to ease their pain.

Even before Alistair Darling's mini-budget of 13 May, the Chancellor did not have much in the fiscal locker moving into this economic slowdown.

That "one-off" £2.7bn giveaway to 22 million households has depleted the stocks even further.

As the Institute for Fiscal Studies (IFS) pointed out this week, it has also created the additional problem that at least 18 million households will now feel like losers next year if and when that temporary giveaway is removed.

So what can - and can't - the government do to make voters feel better?

Here's a quick run-through of the constraints facing Brown and his Chancellor.

Can they cut taxes?

Just a few months ago, economists would have said the Chancellor was lucky to avoid raising taxes in the 2008 budget, given the precarious state of the public finances.

There wasn't much chance of cutting them.

But as we've discovered, Chancellors under pressure are good at finding spare pennies behind the sofa - even £2.7bn's worth. Is there room to do any more?

There have been two big "one-off" giveaways to voters this year: the rise in the personal tax allowance for basic rate taxpayers, and the increase in the winter fuel payment for 2008.

The IFS says it would cost Alistair Darling just under £3.3bn to make these two changes permanent.

On the face of it, the government could not increase borrowing by that amount without breaking its sustainable investment rule, which states that public sector debt must remain below 40% of GDP.

Even on its own forecasts, it's already very close to breaching that ceiling in 2010.

It would crash through it - by maybe £5bn, says the IFS - if it made those giveaways permanent and didn't raise taxes or cut spending elsewhere.

There are ways to cut the cost of the personal tax giveaway.

For example, the Chancellor could freeze the personal tax allowance at its new level, rather than raising it in line with inflation.

That option would take back about a third of the £120 a year that basic rate taxpayers will have gained in 2008-9.

But there aren't many other ways to reduce the cost without raising taxes for millions of middle-income earners in the year before a likely election.

Any chance of fudging his fiscal rules?

Luckily for the Chancellor, some salvation is at hand in the form of a planned revision of GDP by the Office for National Statistics, expected in the autumn.

By changing the way that the UK financial sector is valued, this could increase the estimated size of the economy by about 2% of GDP.

If that happened, the 40% of GDP ceiling for public debt would automatically go up about £12bn, and the Chancellor would have room to make this year's tax cuts permanent and perhaps announce some more.

However, the government would inevitably be criticised for once again fudging their fiscal rules - however justified the statistical revision might be.

And the Treasury would still face the problem of meeting its Golden Rule, which states that, over the course of the economic cycle, it can only borrow to invest.

Whether it can meet that rule depends on when officials decide that a new economic cycle has started, and how long that cycle turns out to be.

But it's safe to say that the more the government borrows now, the harder it will be to meet the rule.

Another fly in the ointment is that lower growth is already likely to see the government overshoot its borrowing forecasts.

The midpoint of the Treasury forecast for economic growth in 2009 is 2.5%.

The IMF, the Bank of England and many others think growth of about 1.6% is more likely.

If they're right and the Treasury is wrong, borrowing could be £10bn higher than the government expects.

What about fuel duty?

As with the 10p tax issue, the main "giveaways" on the table are not so much giveaways as "not-taking-aways".

With petrol prices at record highs, Darling is under pressure not to impose the 2p rise in fuel duty planned for October.

That rise was due to come in April of this year - delaying it has already cost him £550m.

Delaying it one more time would cost a similar amount. And he'd be building up problems for next year's budget, when there's another 1.84p rise due to come in.

As we've already seen, these are not revenues he can easily afford to lose with the prospects for the economy as weak as they are.

Will any of this actually boost the economy?

Many Labour strategists will say that voters put economic growth before prudence.

On that view, voters won't mind seeing some more red ink on the budget books if it's done in the name of rescuing the economy.

Gordon Brown and the Chancellor defended the latest £2.7bn giveaway on exactly these grounds.

Whether voters believed them is a moot point. But in a world of rising inflation and an independent Bank of England, it's not even clear that this kind of fiscal stimulus can work.

Mervyn King, the Bank's Governor, strongly implied in his recent Inflation Report press conference that the Bank's Monetary Policy Committee would take any net increase in government spending this year into account when setting official interest rates.

Unfortunately for the government, the MPC thinks the economy needs to slow down for inflation to fall back toward the government's own target of 2%.

If the Chancellor tries to boost growth with extra borrowing, you can bet the MPC will keep interest rates higher than they might have been to offset any positive effect.

The bottom line?

Gordon Brown doesn't have much cash available to cheer up disgruntled voters.

And the money he does have he will probably have to use on preventing the creation of new enemies rather than winning back friends.

Pity the Treasury mandarin who has to deliver that memo to Number 10.

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