The Moody's Blues

Back in the summer some folks in the UK media experienced a brief frisson of interest in Canada. For reasons that were never entirely clear, the idea got around that Canada cut public spending sharply to deal with a fiscal crisis in the early 1990s, and that this was some kind of example for the UK to follow. As I wrote at the time (on 7 July for example), this was a total crock. Canada hardly cut spending at all back then, and escaped from the fiscal mire largely thanks to low interest rates and solid growth in the US.

We haven't heard much about "the Canadian example" lately, so maybe the Tories, who seemed quite taken with it, have taken the trouble to check the facts, and realised they were being sold a bill of goods. However, as I pointed out at the time, there was one element of the Canadian experience that UK policymakers should take note of. Setting ambitious long-term goals is pointless, or even counterproductive; the key to fiscal success is to set achievable short-term goals -- no more than a year or two ahead -- and then roll them forward in successive budgets until you get to where you want to be. This worked in Canada. The decade or so that it took wasn't exactly pleasant for Canadians, but the process was reasonably pain-free and surprisingly well-accepted by the voters. Canada's AAA credit rating, lost in the 1990s, was restored a decade later.

So what has Alastair Darling given us in the much-awaited Pre-Budget Report? Well, he's sticking by the goal of reducing the budget deficit by 50% in the next four years, which is meaningless, inadequate or both, depending on who you ask, and he's going ahead with measures announced previously (VAT back to 17.5%, new higher-rate income tax bracket and so on). Apart from that and the token tax on bank bonuses, though, almost everything he's announced today won't take effect until 2011 or later.

The individual measures planned at that point are nothing out of the ordinary -- a 1% cap on public sector wage increases, strict limits on programme spending, another hike in NI contributions -- but the key thing about them is that they won't have any effect at all until after the general election. If Labour wins that election it can change its mind; if the Tories win, no doubt they'll do something altogether different. Either way, the real decisions that everyone accepts will have to be made are nowhere in sight.

Moody's made a few threatening noises about the UK's credit rating just a day before the PBR was tabled. Messrs Darling and Brown had better hope they aren't thinking too seriously about cutting it, because there's almost nothing in the PBR to deter them.