The Budget: Has the Chancellor Gone to Sea in a Sieve?

March 11, 2008


Alistair Darling faces his first budget with little wriggle-room to protect his future prospects. Is there some event that he can turn to political advantage? Might he be accused (like the Owl and the Pussy Cat) of going to sea in a spinning sieve?

A typically cool view of the budget prospects from Chris Giles, economics editor of the Financial Times. He captures the complexities of the situation admirably, and pinpoints what he sees as the key issues. I found his economic perspective more enlightening than those offered by more politically-minded commentators.

Pity Alistair Darling. The chancellor of the exchequer has a mere five days left to prepare his first annual showcase Budget, but he is boxed in from all sides. Mr Darling has no option but to downgrade his forecasts for the economy.

There is little room to make progress on Mr Darling’s twin ambitions – simplification of the tax system and greater fairness. Fairness presumably requires tax reductions for the poor or higher public spending. Politically effective tax simplification requires buying off the protests of losers. His botched mini-Budget last autumn was an example of naive tax simplification – a simpler capital gains tax structure was announced without temporary protection for losers, resulting in a humiliating climbdown.

Did I say it was an economic analysis? Chris Giles manages to arrive at a crisp political observation, as well as offering some political advice:

First, he should do everything possible to build a reputation for solidity and prudence on the economy. The credit squeeze was certainly not his fault, nor is the state of the public finances, but he will begin to take the blame if he has to come back to parliament every year with fresh excuses for why things are worse than he set out a year .

The view was shared by one of our correspondents (thanks I.E.).

I do not think he will be able to please most people, like Gordon Brown did in the past. He is in a tight corner. Government borrowing is high which limits his ability to spend on social causes. The global financial turmoil continues and there is no guarantee that another bank would not fail.

Financial institutions and markets are increasingly nervous about policy statements. He needs to be very careful about how the City reacts to taxation and bank regulation, but I think he should not give in to the demands of the City, which I believe is very much de-coupled from the UK economy.

There is a real danger that UK gradually evolves into an economy where a City State (London) which is run by global capital, pulls the rest of the economy with little globally exchangeable skills.

The current financial turmoil reduces London’s contribution to the UK economy and this should be an opportunity to develop competitive skills elsewhere in the economy. High commodity prices and inflation are serious concerns too.

Does he have the vision to address these big problems- falling housing prices, instable financial institutions, less contribution to the economy from the City, and inflationary pressures due high commodity prices? He is in a tight corner and I think he will dodge the big issues and go for technocratic adjustments in most popular areas like taxation, environment, and mortgages.

What about the oil price?

The temptation must be to find a last-minute-dot-com rescue plan for his future prospects in this week’s budget. If so, the surge in oil prices may be just the event for the Chancellor to seize upon.

Commentators are already calculating how much of a budget gift could be made to motorists.

Prudence: The Sequel

In his early months as Chancellor, Mr Darling, for all his appearance of playing the lead part in the political movie ‘Prudence II’, has been seen as a bit light-footed and twitchy under pressure of events.

The budget [Wednesday, March 12th 2008] promises to be as fun-free and measured in tone as Gordon’s performances always were playing the title role in Prudence I. As for content, we already know many of the changes which have been pre-announced. It’s the additional proposals which may tell us a little more about Alistair Darling’s style, and his development into his new starring role.

The pre-announced changes are part of a recent trend by this Government to smooth out its economic measures, through a pre-budget announcements. These became associated with multiple claims of ‘new’ measures, counter claims of the slipperyness of what the Government was doing.

Commentators are writing as if they know quite a bit about the forthcoming budget. Then there are the pundits who like a bit of fiscal detective work. There has been plenty of comments of these kinds around. You can place pre-budget bets on the colour of AD’s tie, number of mentions of Northern Rock, and odds of a 1000: 1 that (pet-owner) Darling will offer a tax-break to pet-owners.

The Owl and The Pussy Cat

There has also been just a suspicion that some of the contents of the budget have leaked out. Has the chancellor, like the Owl and the Pussy Cat in the poem, gone to sea in a sieve?

The BBC retains much of its well-earned reputation for balanced journalism at times like this.

It has arrived at its predictions with whispers from its unparalleled network of political narks, from other press sources and lobby groups such as environmental activists, the CBI, and the Unions.

Chancellor Alistair Darling is expected to introduce measures to encourage the use of cars with low CO2 emissions. Weekend newspaper reports say the chancellor might introduce a levy on new, larger cars that could increase their price by £2,000.

Both the Sunday Times and the Observer say the chancellor is likely to accept proposals from a report commissioned by the Treasury from Julia King, the vice-chancellor of Aston University.

Speculation, or evidence of a leaky-sieve?

Does it matter anyway?

Not according to the brilliant contrarian economist Roger Bootle.
He pinpoints the issues neatly for The Telegraph

This Budget will not be a firecracker. They never are nowadays. Indeed, the institution is a bit like Parliament in microcosm.

The outward form is still largely the same, which gives the appearance of continuity, but in reality the life has gone out of it. The important events are happening outside the Westminster bear pit. The Budget should be regarded as essentially a piece of political theatre.

In another telling phrase he notes

…what happened in Brown’s Britain was a gigantic spending and borrowing splurge. Never mind binge drinking, what about binge spending?

Back to the sieve

I still can’t get those lines out of my mind from the famous poem by Edward Lear:

The water it soon came in, it did,
The water it soon came in;
So to keep them dry, they wrapped their feet
In a pinky paper all folded neat,
And they fastened it down with a pin.

And they passed the night in a crockery-jar,
And each of them said, How wise we are!
Though the sky be dark, and the voyage be long,
Yet we never can think we were rash or wrong,
While round in our Sieve we spin!

A Sieve. Spinning around. A state of denial … Surely there’s a connection somewhere with the budget?