The Westminster blog is taking a break over Christmas and the new year and will return the week of January 4.

Happy holidays.

It’s the big political question of the day. Would – as Labour argue – a fiscal tightening (to tackle the public deficit) put the economic recovery into doubt?

I can’t claim enough economic expertise to make either call.

But Bloomberg has put out an interesting chart today that shows how the UK economy grew during fiscal “squeezes” in both the early 1980s and mid 1990s.

The chart compares annual change in GDP in white with cyclically adjusted public sector net borrowing, a measure of the fiscal stance. Each is for the year ending March 31.

Green bars below zero indicate a tightening of the Treasury’s purse strings. Rising bars show a loosening.

“Simple models say that the more open the economy, the less impact fiscal policy has on aggregate demand,” Ben Broadbent, an economist at Goldman Sachs Group, wrote in a note on Dec. 10. “In line with this, the two other periods of fiscal tightening in the past 30 years — the early
1980s and the mid-1990s — saw quite strong economic growth.”

The obvious counter-argument, however, is that the current deficit is on a scale beyond anything seen in the last few decades in the UK. The two fiscal squeezes illustrated in the Bloomberg chart were relatively mild.

Here’s a piece Alex wrote recently on a Treasury paper setting out historic examples of how deficits had been cut in 20 other countries. Officials concluded that the most successful ones were those that were big and swift.

The Treasury paper also pointed out that economies can grow even as taxes are rising and public spending is being cut.

A Christmas card from Nick Brown, Labour chief whip, arrives through the post. No idea where he found this picture of a young Nick Clegg in fancy dress – but I thought I’d share it.

The Chris Bolt adjudication (I flagged it up yesterday) came through this morning, as my colleague Robert Wright reports. It is particularly bad news for the Tube Lines PPP consortium.

The PPP arbiter has told Tube Lines it will have to do the upgrade work on its three Underground lines for £4.4bn. That suggests a gap of £1.35bn between the figure of £5.75bn which Tube Lines insisted it needed to carry out the 7.5-year programme.

Not that the judgment is great news for Boris Johnson and TfL: They insisted that they could not pay out more than £4bn or so – creating a £400m gap which needs to be filled by either downgrading some of the Tube work or making cuts elsewhere in the transport budget.

Robert Wright writes:

If Tube Lines ends up shouldering the full £1.35bn extra, it will have to seek to borrow the money. If it cannot do so, the end result could be that LU will take control of the company. However, Tube Lines has always maintained that this is an unlikely outcome.

What was bizarre about the Hutton inquiry was the disconnect between the often sensational evidence and the ultimate “whitewash” report.

Who knows how Sir John Chilcot will jump when it comes to ordering the evidence to his inquiry into some kind of published form?

I dropped into the inquiry for three hours this afternoon (normally Alex covers it for the FT) and a few comments leapt out.

There was one point where Sir John Sawers, former political director at the Foreign Office – and now head of MI6 – claimed the government had achieved various goals set in 2003 such as a stable, united, law-abiding, co-operative, unthreatening state.

Chilcot dismissed this curtly:

“The picture that is painted in that statement of objectives is not, I think, what you would find in Iraq today.”

Interestingly, Sawers also admitted that Britain might have baulked at invading Iraq if it had known what would have happened next:

“Had we known the scale of the violence it may well have led to second thoughts about the entire project.”

The windy summing-up by Chilcot was also an indication that he may not take a favourable view of the Iraq venture.

I think we have talked a lot about potential, if not final judgements, at any rate provisional judgements about the whole six years. And I think the committee itself is extremely … aware of the casualty list, the blood. Treasure you can rebuild. Blood you can’t get back. I don’t know whether at this stage we shall come to the kind of final judgement that these last questions have raised. This may be the first draft of history. But we are conscious throughout of that cost that has been incurred by humankind. I think I’ll close with that.

Today’s NAO report is yet another reminder of the dismal state of the defence equipment budget. The graph below sets out how bad the situation is until 2020. The best case scenario is a £6bn budget shortfall — and that is based on some quite rosy assumptions.

The MoD buys kit, which often takes a decade or more to deliver, on the basis that their cash budget will rise by 2.7 per cent a year. In good times that would be acceptable (although you have to wonder why they think the Bank of England will overshoot its inflation target by 0.2 per cent). But in these straightened times, that seems dangerously optimistic. If the budget is frozen (the blue line in the graph) the gap in the 10 year budget rises to an eye-watering £36bn.

Now imagine the worst case scenario, where the MoD budget is cut in line with other departments in Whitehall that have not been protected. A 2.7 per cent a year real terms cut would put the budget deficit at more than £60bn, which basically would mean the department could only afford half the kit it is committed to buy.

One last point on the NAO report, which was brutally frank about the unaffordable budget. Just remember that the new head of the public spending watchdog is of course Amyas Morse, the former commercial director at the MoD. He was part of the machine that endorsed the decisions that exacerbated the long term problems. Does he have scores to settle from his time at the MoD? I don’t know. But most people tend to leave this troubled department bearing scars.

The Guardian has splashed this morning on a story that Darling wanted to impose a VAT rise above 17.5 per cent in the PBR but was prevented from doing so by the prime minister. Instead the Treasury agreed to increase National Insurance; in 2011.

The story has been cast as part of a wider dispute over how fast to cut the UK deficit.

My understanding is that Darling was keen to put VAT up by one or two percentage points – although not as high as 20 per cent. (Although I’m told the debate was settled a couple of weeks ago).

Lifting the levy to 19 per cent would have raised about £5.7bn a year (on the basis that VAT revenue forecasts for this financial year is £67bn.) As such, the rise would have gathered nearly double the 0.5 per cent increase in National Insurance, which is expected to bring in about £3bn a year.

What is not clear, however, is the timing. In theory the VAT increase could have happened next month, making an immediate dent on the deficit. The NI increase is still 16 months away.

What would make the story more interesting is to know whether Darling would have put up the VAT straight away or not. If he was going to wait until early 2011 it’s harder to present this as such a big difference of opinion.