LET'S cut to the big issues in Chancellor Alistair Darling's first Budget, to be unveiled on Wednesday. These are the complex questions on which bookmakers William Hill has opened books. Will he be wearing a red tie (Labour traditional) or a green one to stress his environmental credentials? (There are odds of 6-4 on red, the same as him imposing a tax on supermarket plastic bags.)
How many sips of water will he take? (Spread betting firm Sporting Index hopes to tempt the punters over the length of Darling's speech and how many sips of water he might take. It is predicting a 57-minute speech and just one sip of water. But taxin
g mineral water is a 9-2 shot.)
Since Mr Darling is the proud owner of a cat called Sybil and a rabbit called Bertie, will he take a penny off income tax for pet owners? (The odds are 1,000 to 1.)
No bets are being placed on the most sensible option of all for the Chancellor: a Budget speech as suggested by CBI director-general Richard Lambert of just six paragraphs, with all significant tax changes deferred for the foreseeable future.
For few Budgets in living memory have been presented against such a turbulent and uncertain background: an unravelling credit crisis, a tumbling stock market, a traumatised mortgage market, a slowing economy and worsening inflation.
Neither the Treasury nor the corporate sector nor the markets know how these huge uncertainties will play out. We could escape with a mild downturn. But if the credit crisis deepens and a serious contraction sets in, there is every prospect of a collapse of business and household confidence. The main monetary policy tool, interest rate cuts, cannot be wielded with speed and conviction because of the continuing rise in inflation.
So it could fairly be argued that the background to this Budget is more important than the Budget itself. And it is one that counsels caution, for fear that any substantial tax change at this time could have unintended consequences and make an already difficult situation much worse.
As it is, the Chancellor is likely to defer the implementation of any announced changes into the next financial year – 2009-10. And there is plenty of precedent for him to announce a further Budget in the late autumn, by which time the pace and scale of the slowdown may be better known.
For the moment, Chancellor Darling will be no George Bush. He has no big sums to give away via a fiscal stimulus package. The Treasury's cupboard is bare. And he dare not risk a significant tax-raising Budget either, for fear that this would add to the slowdown pressures already evident.
What good news there is will be limited. Higher than expected surpluses in the public finances in January mean that the Chancellor should be able to announce a budget deficit for the financial year 2007-08 of about £36.5bn, or 2.6% of GDP. While this is fractionally below the forecast of a £38bn deficit forecast in the late autumn Pre-Budget Report, it is up from £30bn in 2006-07 and above his predecessor's £34bn forecast in the spring Budget. Indeed, this is the sixth year in seven with the fiscal deficit above the Budget forecast from the start of year.
What is worrying for the Treasury is that the budget deficit has continued to grow despite a better than expected performance in the UK economy in the second half of last year. This year the growth outlook is not favourable at all. Back in the Pre-Budget Report, the Treasury was forecasting growth in the range of 2%–2.25% in 2008 and 2.5%–3% in 2009. The Chancellor is expected to revise down these numbers, to 1.75%–2.25% and 2.25%–2.75% respectively. Markedly slower consumer spending and GDP growth are set to undermine VAT and corporation tax receipts.
Simon Hayes at Barclays Capital expects Government borrowing in 2008-09 to rise to £40.8bn, or some £5bn higher than forecast in the Pre-Budget Report. And by 2011-12, borrowing is likely to be some £11bn higher. The numbers that Darling is likely to announce on Wednesday will be more modest.
The Chancellor is likely to attribute much of the UK slowdown to weaker global growth, tighter lending conditions due to the US sub-prime mortgage crisis, and high energy, food and commodity prices. He may well also argue that GDP growth in the UK is expected to be higher in the Eurozone and the US in 2008 (the consensus forecast is 1.6% and 1.6% respectively).
But as Howard Archer, economist at Global Insight, notes, this does not mask the fact that the UK economy has problems of its own, notably including high household debt levels and an overextended housing market, while the public finances are in poor shape despite the economy experiencing extended robust growth during Labour's time in power.
What of tax changes? Prepare for small potatoes. It is only possible to generate large amounts of extra tax revenue by changing one of the 'big four' taxes – income tax, national insurance, corporation tax and VAT. With changes to income tax and national insurance already due to take effect in April, alongside the controversial changes due to capital gains tax and the treatment of 'non-doms', any substantial overhaul of any of the major tax streams would be politically tricky as well as high-risk in financial terms. Most analysts are expecting very little by way of net change.
So the thin fiscal gruel is likely to be flavoured by small announcements padded out with much earnest commentary.
There is nothing wrong per se with small change or standstill Budgets. The presentational dilemma for Mr Darling is how to unwrap such a small package without seeming mouse-like at the Despatch Box or like an out-of-his-depth minister in the face of dreaded 'events'. Mustering some sense of command and authority will be a real challenge, especially for a Chancellor who has already been knocked sideways by the Northern Rock debacle.
It may be a thin, no-risk Budget. It's the climate all around that is packed with problems.
