pre-Budget report

It’s the new year, but the big questions facing the British economy – how fast should it reduce its gaping 13 per cent of national income budget deficit, and how much can monetary policy offset fiscal tightening – remain unanswered.

In the annual FT survey of British economists, the most commonly cited economic threat for 2010 was a fiscal crisis, raising the cost of servicing Britain’s public debt and raising risk-free interest rates, thus undermining the recovery. But economists were split almost 50:50 about how quickly the deficit should be reduced.

On one side of the argument, those urging caution worried about the consequences for the recovery of rapid action in raising taxes or cutting public spending. The counter view was that a failure to act soon will lead to rising costs of servicing debt and that would, itself, undermine the recovery.

I don’t have a good answer to this genuinely difficult balancing act. But the answer must relate to Read more

When your public finances are in a deep hole and you need to raise money fast, there is nothing governments like more than taxing foreigners. History is littered with efforts to make outsiders pay for local public services and wars. They range from customs duties and turnpike tolls to modern airport departure taxes and hotel taxes. Let’s face it, if we could tax martians, we would. Read more

Treasury officials have just finished giving evidence at the Treasury Select Committee on last week’s fiscal plans announced by the UK government. Three things materialised:

  • Treasury officials appear to have been told they are not allowed to reveal the government’s plans for cutting departmental spending from 2011 to 2014. Instead, they evaded the issue, obfuscated and squirmed. It was a terrible spectacle. Worse, it is absurd that ministers are too scared to tell the public what is projected for

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Two days on and the UK’s pre-Budget report is still generating huge amount of political heat with little light and none of the arguments has anything to do with the windfall tax on bonuses.

Depending on who you read, the PBR was either an eye-wateringly tight budget with swingeing tax rises and spending cuts, a fiscal loosening or a neutral statement. All three can be true depending on what form of legitimate comparison you choose to make. I’ll tell you what I think in a second, but the upshot is whatever assumptions you make, the numbers are small and so have minimal effect on the economy, the likely recovery or the exit from extraordinarily loose monetary, fiscal and financial policies. Read more

Alistair Darling’s task in the pre-Budget report was to improve the credibility of Britain’s deficit reduction plans for the public, the markets and for those running monetary policy. I am convinced this report will fail on all counts.

With a couple of hours digging through the numbers, the report strikes me as deeply political and its presentation extremely unhelpful. This is not the way to gain credibility. Why? Read more

Today’s papers are full of what I know to be well-sourced speculation that the chancellor will introduce some levy on bankers’ bonuses in the pre-Budget report on Wednesday. We do not know exactly what the chancellor is planning. With the PBR not yet finalised, I am not sure the UK Treasury does either. But this is the position as I see it:

Related FT story

The Bank of England is likely to be dull tomorrow, writes Chris Giles of the Financial Times. No change on rates; no change in the target for quantitative easing; and no statement. But the November decision will be much harder to call, especially as it will come after the first estimate for third quarter growth and a possible pre-Budget report with the government’s new deficit projections.  Read more