- But the tightening announced over and above that
embodied in the Labour Government's plans, although somewhat
larger than many outside commentators expected, was in fact
fairly modest, building up to about 2% of GDP per annum. So
much of the pain announced by this government would have
been inflicted under Labour.
- This Budget still hides some of the pain that will be
felt because it has not yet laid out the detailed plans for
public spending. That has to wait until the Spending Review
due in October. All we know is that outside the protected
departments, departmental spending will be cut by 25% in
real terms, compared with implied cuts of 20% under Labour.
- The deferral of the VAT rise until January 2011 was a
deft move, not least because it will help to keep inflation
down this year. But beyond this year the danger is not
inflation but deflation. Freezes which appear to be both
painful for the victims and generative of lower borrowing
for the Exchequer would be neither if prices were falling.
Similarly, the "triple-lock" deal on pensions would turn out
to be inordinately expensive.
- Although the Budget delivered a tightening over and
above what was built into the OBR's pre-budget forecast of
1% of GDP in 2011/12, the growth of the economy has only
been revised down by 0.3% of GDP. This assumes a significant
crowding-in effect on private expenditure. Interest rates
may go up by less than would have happened under the old
fiscal policy, but there is not much scope for them to go
down. Any monetary response, therefore, would have to rely
on more quantitative easing. Yet this has not seemed to be
very effective so far.
- Accordingly, the great danger is that the economy turns
out to be weaker than anticipated, both because of the
budget and for other reasons, causing government borrowing
to be correspondingly higher. The budget gives no clue as to
how the government might respond.
- This downside economic risk reinforces my view that
interest rates are set to remain at or near current levels
for the duration of this parliament, and that on inflation
the main risk is to the downside. With many countries now
competing in the austerity stakes, deflation is a serious