Tonight:
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Alistair Darling will next week deliver the most important Budget in decades with the public finances in disarray, the economy shot to pieces, and ministers describing the once-disastrous prospect of an IMF bailout as “like going to a spa to recuperate”.
The Chancellor is planning an “austerity Budget” for 22 April to chime with the times and although a new round of fiscal stimulus has not been ruled out, any extra funding for the economy is likely to be limited. The Government has already piled £750 billion of our money into Britain's banks and tens of billions more into the economy via tax cuts and spending projects.
But while the banking bailout undoubtedly saved the financial system from collapse, there is little sign the fiscal stimulus has done much for the economy beyond that.
Unemployment is soaring, businesses are going bust, the housing market is in decline and Britain is plunging into its worst recession since the Second World War. An expensive and temporary cut in VAT is hardly the tonic required.
Darling will, of course, talk of what Gordon Brown likes to call “real help” for businesses and consumers. There will be a “green revolution” and 400,000 eco-friendly jobs to drag the country out of recession, incentives to buy new cars, lending guarantees for small businesses and support for the housing market. But in reality, this will amount to little against the biggest financial crisis since the Great Depression.
The Prime Minister, who long sacrificed prudence, would love Darling to lavish billions of pounds more on the economy through handouts and tax cuts but the cupboard is bare.
After stiff opposition from the Treasury and an unprecedented warning from the Bank of England that the country cannot afford another round of stimulus, Number 10 has backed down.
Brown last week hinted that the Treasury would have to announce more medium-term tax rises and tighter spending to get Britain back into the black. “It is not just what we do to give real help to people and business now, but about setting a path for the future as well,” he said.
If as suspected the Treasury delayed the Budget from its usual date in March until late April in the hope of benefiting from a bounce in the wake of the G20 and visit of Barack Obama, it will be bitterly disappointed. Labour's poll ratings have not improved, the recession has deepened, and stock markets remain jumpy. Most painfully of all for the Government, and as figures will show on Budget Day, unemployment is rising sharply despite initiative after initiative from ministers.
Darling has already admitted he was wrong about the length and depth of the recession but will next week have to flesh out exactly how badly he misjudged the situation. He will be forced to rip up his wildly optimistic growth forecasts, accept tax revenues have slumped far more than expected, and borrow even more than the hundreds of billions of pounds outlined in the Pre-Budget Report in November.
The growing level of debt will inevitably lead to tax rises after the General Election next year — the Institute For Fiscal Studies reckons the shortfall amounts to £1250 in tax per family a year. If it wasn't for 12 years in the wilderness, the Tories might think it would be a good election to lose. The political battle lines are drawn but behind what is the most eagerly awaited Budget in years is an economy and a Government on the rocks.
Key issues to look out for in Budget
Growth
The Chancellor was in danger of treating voters like fools in November when he said the economy would recover in the third quarter of the year. He has since admitted he was wrong, so Treasury predictions of GDP to fall 1% this year and rise 1.75% will be dramatically downgraded. The Bank of England, the World Bank and the IMF all predict output to slump by 3% to 4% this year with little if any growth next year. Darling will be more upbeat and is likely to signal a return to growth in the fourth quarter.
Revenues
The recession has seen tax receipts collapse. From income tax and corporation tax to VAT and stamp duty, the flow of funds into Treasury coffers has fallen well below expectations. Revenue & Customs hoped to raise £447.1 billion in 2008-9 and £427.5 billion in 2009-10 but these numbers face severe downgrades in the Budget to below £400 billion leaving the Government short of spending power.
Borrowing
Whatever borrowing figures the Chancellor comes up with on 22 April, there will be jeers from the opposition benches. In November, he forecast borrowing of £458 billion over the next five years peaking at £118 billion in 2009-10. It was far more than the £162 billion Darling expected to borrow in March 2008. There will be yet another set of revisions next week with borrowing set to hit £170 billion this year and £200 billion next year. Whatever the figure, record debt levels are on the way, heading towards 80% of GDP.
