Anticipating the budget

The first Budget of the Conservative/Liberal Coalition is not long away - at 3:30pm today.  The talk beforehand has been of cuts of course and there is a real risk that this new move across Europe towards austerity will plunge the world into a period of slower growth or worse - we have yet to escape repeating the 1930s (there was a recession in 1937 as governments tightened fiscal policy).


I suspect there might be a surprise in store.  Osborne and Cameron are fans of the Thatcher years.  Geoffery Howe's first budget hiked up VAT and took some bold action (which is not to say it was the right action - that debate is for another entry).  Osborne may look to surprise here and administer what he will believe is strong medicine early on in this government's term of office.


I am interested to see exactly how much in spending cuts Osborne announces that is in excess of what Labour had already planned.  Let's not forget Labour's plans removed last year's stimulus and projected tough spending cuts; tougher than were seen under Thatcher.  But Labour took the view that the recovery could be fragile in 2010/11.  To what extent will Osborne increase cuts this year?  And to what extent will he really be filling in the details of spending cuts that Labour (or any party) had yet to announce?


There are two types of spin around this Budget.  One is political - the ConLibs are telling the country we're facing hard times and it was all the fault of the other lot.  One problem with this has been that Osborne's own creation, the Office for Budget Responsibility (OBR) has in effect supported Alistair Darling's projections.  Indeed, while it assumed slower economic growth in future, it took a less prudent approach to estimating tax revenue and spending which helped lower its estimates of the deficit.  And we now have new figures for 2009/10: the Office for National Statistics now estimates that the deficit last fiscal year was £23bn lower than Darling had predicted in December.


The other type of spin is focused on financial markets.  Some investors want to see evidence of government resolve, so the government (with establishment support eg Bank of England) is talking austerity.  It seems both Treasury and Bank were particularly worried during the Greece fiscal crisis that markets might focus on the UK.


Indeed if this austerity move does not pay off, and if the economy slows down again (it's not really recovered that much yet though as a result of the last government's actions we might expect to see growth continue), it will not only be Cameron, Clegg, and Osborne who will be held responsible, but Bank of England Governor Mervyn King too.  The stakes are high.

Stephen Beer, 22/06/2010

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