Making vases from shards

The dumbest possible criticism of Alastair Darling's budget, and hence by far the most common in the media, is that it's "political". (Or as the Times has it, with an American Beauty-influenced cartoon of a naked Mr Darling, "Nakedly Political"). There's a general election coming in six weeks or so, one that's likely to be the most closely-fought in years. How could the budget not be "political"?

Considering how little he had to work with, Darling actually didn't do badly, with a little something for a lot of people. Stamp duty relief for less well off homebuyers paid for by a higher duty for wealthier ones; a nod toward the long term with a "green" investment bank and a fund to help university-based businesses (just what we need: two more quangos); even something for the motoring lobby, with the planned fuel duty rise to be phased in more slowly and £100 million extra to fix potholes. The principal requirement for this budget was probably the Hippocratic imperative: "first, do no harm". Darling has done a bit better than that: no harm and maybe just a little bit of good.

From an economic standpoint, of course, the big and interesting questions revolve around the overall fiscal projections and the economic growth forecasts that underlie them.

In one respect, at least, Darling does seem to have responded to suggestions that he should follow the deficit-cutting techniques allegedly pioneered by Canada in the 1990s. This Canadian precedent is almost entirely an illusion, but leave that aside for the moment. One trick that Canada's then Finance Minister, Paul Martin, used repeatedly was to understate the likely improvement in the fiscal situation, as a way of keeping everyone (especially money-hungry government departments) focused on the task at hand. Darling seems to be doing the same. The £11 billion downward revision in the expected deficit for the current year, to £167 billion, is good news, but not enough to allow anyone to think that the crisis is over. But in fact, there's every possibility that the outcome will be better than that. To cite just one reason, robust retail sales data for February suggest that VAT receipts in the first quarter of 2010 (which is the final quarter of the fiscal year) will be very strong. And if the economy really is getting back on track, then the projection that the deficit will fall by only £5 billion in FY 2010/2011 is very likely to be bettered.

Looking further out, the Treasury expects GDP growth to accelerate from 1-1.25% this year to 3-3.5% in 2011. Similar growth in the "out years" will allow the Government to meet its existing target of cutting the deficit in half over the next five years. This growth forecast has been roundly criticised by the opposition and much of the media as unrealistic, but it has at least one strong defender. Unfortunately it's Anatole Kaletsky, whose forecasting has been the brunt of much criticism not only in this here blog but also in Private Eye and, if rumours peddled by the Eye are to be believed, among the clients of his pricey consulting service. I'm not sure if Kaletsky intends this to be faint praise or what: In his calm, methodical manner, the Chancellor offered a picture of the future that was at least internally coherent and consistent with reality in today’s Britain, even if it may turn out to be wrong. A bit like one of Kaletsky's own forecasts, then, aside from the "coherent and consistent" part.

Kaletsky argues that it's appropriate for Darling and the Treasury to count on a strong rebound in the economy:

...that is exactly what any sensible Chancellor in the present circumstances should do.

Historical experience and economic theory both suggest that the deepest recessions are followed by the strongest recoveries. When the economy starts an expansion phase with enormous amounts of excess capacity and under-utilised labour, as it does today, then very rapid growth is compatible with low inflation.

In principle, therefore, the Treasury’s decision to base its fiscal forecasts on an assumption of 3 per cent growth next year and 3.25 per cent in the three years thereafter is actually quite conservative.

Well, maybe. There are already signs that inflation is stirring, and one of the surprises of the current slowdown has been how little unemployment has risen, so there may not be as much slack in the labour force as Kaletsky hopes, unless he is planning to lure all the Poles and Czechs back to the UK. Just as important, one of the strongest lessons provided by "historical experience" is that when a recession has been caused by a financial crisis, recovery tends to be difficult and gradual. The Government obviously hopes to remedy this by leaning on the banks to increase business lending, but it's far from certain that this will work.

So even if a revival in the economy will do some of the heavy lifting, there's still work to be done, and hard decisions to be made once the election is over. Although Darling didn't do a bad job yesterday, it's hard to see how he can have made much inroads against all of the other problems besetting the Government. And if the Budget does prove popular with the voters, the Tories and LibDems can always remind them that it was almost certainly Darling's last hurrah: if Labour gets re-elected, the awful Ed Balls is likely to get the keys to 11 Downing Street.