A Budget with looming shadows

There were no rabbits in his hat. Hanging over Darling's speech was the spectre of global economic u

First it was going to be the green Budget. Then it was the anti-booze Budget, next the steady-as-she-goes Budget and, just at the last moment, the child poverty Budget. Budgets these days have to be all things to all people, or at least most things to as many people as possible. With a growing political consensus over the priorities of government, this would have been true even if it had been George Osborne standing up in parliament on 12 March. Budgets must be business-friendly and yet tackle inequality; they must give generously to public services while cutting the tax burden; and they must address the immediate issues of the day - this year it is the turn of first-time housebuyers, supermarket plastic bags and polluting cars.

In the end, Alistair Darling's first Budget has been the "hard truths" Budget. Under the pressure of an ever-slowing economy, the Chancellor was forced to outline the bleakest financial situation since Labour came to power in 1997, although not quite as grim as some predicted. He should be congratulated for avoiding the temptation to pull last-minute rabbits out of hats. "Not really his style," according to one aide.

As expected, he downgraded his forecast for growth for 2008, outlined in his Pre-Budget Report as being between 2 and 3 per cent, to between 1.75 and 2.25 per cent. Scare stories from the weekend before the Budget suggested he would need to raise £240 per household in taxes to plug a £5bn black hole in the public finances. The sums may appear complex and confusing, but much of the Chancellor's work is simple arithmetic - as revenues to the Exchequer drop, he either has to tax more or borrow more to honour the government's spending plans. In the end he will do a bit of both, but either way, Darling is in a dark place.

As he prepared the Budget in the full knowledge that the Bank of England, the European Central Bank and the US Federal Reserve were all pouring billions of dollars of funds into the money markets to avoid a global recession, he must have felt like the unluckiest man alive. Alone at the Despatch Box with just a glass of tap water for company, Darling was on the spot and it was his job and his alone to inform Britain of the naked truth about the state of the economy. His contention that the present situation is not as serious as during the worst Tory years is basically sound. Britain is still a high-employment, low-inflation economy. Growth may be slowing down but it had, indeed, been sustained for 62 quarters, a better record than for any of our major competitors.

It is also true that Darling has been dealt a duff hand, and not just by the American "sub-prime" mortgage crisis (for which no one can hold him responsible) but also by decisions of his predecessor, who built an edifice of public spending commitments on the assumption of continued growth. But, to an extent, politicians create their own luck and much of Darling's speech was taken up with atoning for the political miscalculations of his Pre-Budget Report in October. He held his nerve on the £30,000 levy on "non-domiciles", who avoid paying tax in Britain by moving their financial affairs elsewhere, but was forced into concessions. It is thought a deal has also been reached with the US Treasury on payments from American citizens. The Chancellor's attempt to simplify capital gains tax by introducing a flat rate of 18p had to be revised after he came under pressure from the business community. In less difficult times, such changes would have been seen as tweaks. In the present atmosphere, however, everything Darling does is scrutinised by the City for signs of indecisiveness.

As the analysis of the Budget plays out, attention will inevitably turn to the reaction in the Square Mile, where the knives have been out for Darling almost from the moment he arrived at 11 Downing Street. But some of the wisest economic heads in the country are turning to another area of grave concern: the state of our public finances. It is of course true that everyone is affected by the mood of Britain's financial markets, but a far more immediate impact will be felt as the money for schools and hospitals starts to dry up.

One problem for Darling is the growing national debt. The Chancellor's best Budget soundbite - that Labour has "turned welfare into work and borrowing into wealth creation" - is at the very least arguable. The Chancellor made much of Labour's record on borrowing. But David Cameron was right to raise the issue of Northern Rock. The so-called "sustainable investment rule", which states that net public borrowing should remain at or below 40 per cent, has already been shaken by the nationalisation of the high street bank, whose liabilities in reality push the figure closer to 45 per cent. If estimates of the economic slowdown are correct, the borrowing necessary to plug the hole in the public finances will push this figure even higher. In fact, even Darling's estimates push it within a percentage point of the 40 per cent danger point.

The investors' verdict

Then there is the looming shadow of the government's Private Finance Initiative schemes, which were designed specifically to keep borrowing off the Treasury's balance sheet. These projects, which use private funding for large public projects such as schools and hospitals, will soon be included as part of the national debt to bring Britain in line with International Financial Reporting Standards. At the same time, liabilities from public sector pension schemes, which have been badly hit by the international credit crunch, will also contribute to the growing debt. Some estimates suggest that the combined liabilities of pension and PFI schemes would bring the proportion of debt to 100 per cent of GDP.

In one sense, the sustainable investment rule is just an arbitrary measure, set by the government to measure its own economic competence. What really matters is the attitude of global financial institutions to such profligacy, and investors' preparedness to put their money into new projects. In the new period of economic uncertainty, the British public would certainly begin to notice if plans for a shiny new hospital or school were put on ice. Already concerns have been raised about the slow progress of the government's PFI-funded Building Schools for the Future programme.

The real issue is that we don't know the full consequences of the slowdown for the public purse. New Labour has never been here before. A recent article by Paul Gosling in Public Finance magazine put it succinctly: "Underlying everything is a fog of uncertainty. The use of 'financial engineering' and the complex hedging of financial risk means there is very real confusion about exactly who has lost what from the sub-prime crisis - and that is affecting almost everything on the world's financial markets."

Darling's first Budget was just the sort of solid, unflashy affair demanded in the circumstances. Many of the details will be welcomed by people Labour should care about: children, the poor and the old. But it will all mean nothing if he fails to address that fog of uncertainty afflicting the public finances.

This article first appeared in the 17 March 2008 issue of the New Statesman, Iraq: the war that changed us

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Forget planning for no deal. The government isn't really planning for Brexit at all

The British government is simply not in a position to handle life after the EU.

No deal is better than a bad deal? That phrase has essentially vanished from Theresa May’s lips since the loss of her parliamentary majority in June, but it lives on in the minds of her boosters in the commentariat and the most committed parts of the Brexit press. In fact, they have a new meme: criticising the civil service and ministers who backed a Remain vote for “not preparing” for a no deal Brexit.

Leaving without a deal would mean, among other things, dropping out of the Open Skies agreement which allows British aeroplanes to fly to the United States and European Union. It would lead very quickly to food shortages and also mean that radioactive isotopes, used among other things for cancer treatment, wouldn’t be able to cross into the UK anymore. “Planning for no deal” actually means “making a deal”.  (Where the Brexit elite may have a point is that the consequences of no deal are sufficiently disruptive on both sides that the British government shouldn’t  worry too much about the two-year time frame set out in Article 50, as both sides have too big an incentive to always agree to extra time. I don’t think this is likely for political reasons but there is a good economic case for it.)

For the most part, you can’t really plan for no deal. There are however some things the government could prepare for. They could, for instance, start hiring additional staff for customs checks and investing in a bigger IT system to be able to handle the increased volume of work that would need to take place at the British border. It would need to begin issuing compulsory purchases to build new customs posts at ports, particularly along the 300-mile stretch of the Irish border – where Northern Ireland, outside the European Union, would immediately have a hard border with the Republic of Ireland, which would remain inside the bloc. But as Newsnight’s Christopher Cook details, the government is doing none of these things.

Now, in a way, you might say that this is a good decision on the government’s part. Frankly, these measures would only be about as useful as doing your seatbelt up before driving off the Grand Canyon. Buying up land and properties along the Irish border has the potential to cause political headaches that neither the British nor Irish governments need. However, as Cook notes, much of the government’s negotiating strategy seems to be based around convincing the EU27 that the United Kingdom might actually walk away without a deal, so not making even these inadequate plans makes a mockery of their own strategy. 

But the frothing about preparing for “no deal” ignores a far bigger problem: the government isn’t really preparing for any deal, and certainly not the one envisaged in May’s Lancaster House speech, where she set out the terms of Britain’s Brexit negotiations, or in her letter to the EU27 triggering Article 50. Just to reiterate: the government’s proposal is that the United Kingdom will leave both the single market and the customs union. Its regulations will no longer be set or enforced by the European Court of Justice or related bodies.

That means that, when Britain leaves the EU, it will need, at a minimum: to beef up the number of staff, the quality of its computer systems and the amount of physical space given over to customs checks and other assorted border work. It will need to hire its own food and standards inspectors to travel the globe checking the quality of products exported to the United Kingdom. It will need to increase the size of its own regulatory bodies.

The Foreign Office is doing some good and important work on preparing Britain’s re-entry into the World Trade Organisation as a nation with its own set of tariffs. But across the government, the level of preparation is simply not where it should be.

And all that’s assuming that May gets exactly what she wants. It’s not that the government isn’t preparing for no deal, or isn’t preparing for a bad deal. It can’t even be said to be preparing for what it believes is a great deal. 

Stephen Bush is special correspondent at the New Statesman. His daily briefing, Morning Call, provides a quick and essential guide to domestic and global politics.