Larry Elliott: Will voters buy Darling's budget sleight of hand?

Darling's budget tried to create a 'dividing line' that you can't cut your way out of recession. But will voters buy it this time?

Barring the desultory nod to climate change, everything else about Alistair Darling's budget was a throwback to the mid 1970s. There was the ballooning budget deficit on the back of a severe recession. There was the income tax increase for the rich. Above all, though, there was the sense that a Conservative government is coming.

That's not meant as a criticism of the chancellor. In a bricks-without-straw way, Darling did as much as could be expected in what was a cleverly conceived package. Everybody was in the same leaking boat, he said. Everybody was bailing out together, he insisted. The first-class passengers would do more than their fair share of bailing, he stressed. And within a couple of years, everything would like shipshape and Bristol-fashion again. From the bridge of HMS Fantasy Island everything looks fine.

The problem with the budget, however, was that its strengths were vastly outweighed by its weaknesses. The extra cash to kickstart work on mothballed housing projects was sensible; pensioners struggling with the consequences of the lowest interest rates in Britain's history were given some limited help; there was a long-overdue pledge to invest some money in the growth industries of the future. Above all, it was welcome that the package showed a commitment to tackling unemployment among the young through a guarantee of a job or training for all those under 25 who have been out of work for more than 12 months. All the evidence shows that a prolonged spell of joblessness leaves particularly deep scars on the young, and Darling had a well-justified dig at the Tories for their laissez-faire approach in the 1980s. The alternative to what he was proposing, he said, was a "return to the days when a whole generation of young people found themselves abandoned to a future on the scrapheap".

On the other hand, there were grave disappointments. The nugatory amount found to tackle child poverty fell well short of the £3.5bn the Institute for Fiscal Studies says it needed to meet the government's interim 2010 target of halving by the number of young people living below the breadline. The environmental lobby said the rhetoric in the budget speech about meeting climate change targets was belied by the relative modesty of the measures. A Green New Deal it certainly was not.

Yet these were minor failings in comparison to the budget's major weaknesses. The first is that the immediate outlook for the economy and the public finances is dire, with unemployment continuing to rise up until the last possible date for the next election, whether or not growth snaps back as quickly as Darling expects. It was hard to find a single economist on Wednesday who believed that the economy would grow by 1.25% in 2010, let alone grow by 3%-plus for the three years after that. Yet, without that turbocharged performance, there is not the remotest possibility of the budget deficit being halved by 2013-14.

Is it possible that the Treasury is right and every other forecaster wrong? Yes, it is – even though Darling got it spectacularly wrong in November when he thought the drop in GDP this year would be limited to 1% and recovery would begin in the summer. He still believes that the combination of cheap money, lower inflation, a weaker pound and fiscal easing will deliver a V-shaped recovery, but has now put back the timing of the bounce until the end of 2009. This does represent a colossal stimulus and it may start to work sooner than the pessimists think.

But Darling made it clear that this is the last year of fiscal stimulus and that policy will be tightened from 2011. The Bank of England will start raising rates as soon as it thinks the economy is off the floor. And this will come at a time when unemployment is rising and the housing market remains weak. The Treasury sought to combat deep City scepticism about the outlook for growth and the public finances by pointing out that there were strong recoveries after the deep recessions of the early 1980s and early 1990s.

But this is an exceptional downturn: it goes to the heart of the financial system; it is globally synchronised; and it has led to wealth destruction on an unprecedented scale. Growth rates of 3%-plus from 2011 onwards are for the birds.

That leads on to the second weakness of the budget: the sleight of hand that the damage to the public finances will be repaired by soaking the rich. Consider this. Having told us a year ago that the budget deficit would be £38bn in 2009-10, Darling revised the figure up to £118bn in the pre-budget report in November and to £175bn yesterday. That represents a deterioration of £137bn. In total, the new 50% tax rate, scrapping tax allowances and restricting tax relief on pensions will raise, at best, £7bn. Bringing the deficit down to more manageable levels will require years of implausibly high growth, a squeeze on public spending that will be even more severe than during the Thatcher years and, once the election is over, more widespread tax increases.

Yet, the budget requires voters to swallow the idea that the politics of the next five years will be a re-run of the past five years, with Labour as the party that defends public spending and the Conservatives as the party wielding the axe. Gordon Brown won two elections that way, and would dearly love to fight the 2010 election on the same basis. Darling's comment that "you can grow your way out of recession. You can't cut your way out of recession" was meant to drive home that point.

But with the deficit at a peacetime record, my guess is that this strategy won't wash with the voters a third time. And, what's more, the government probably suspects as much. That's why this budget leaves all the really tough decisions for the next government to take. Brown still nurtures hope that Labour will win in 2010, but has left a poison pill for David Cameron, just in case.

Contributor

Larry Elliott

The GuardianTramp

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