Fishburn Hedges

16.04.2009

Alistair Darling faces one of the most difficult economic scenarios that any Chancellor has had to face in the last 40 years, as he prepares for his second Budget. With the UK in the depths of recession, and Labour consistently trailing the Conservatives in the polls, nobody will envy the Chancellor his task of trying to convince the public that this Government is best able to steer the country towards recovery. Darling will find his hands are tied as he tries both to balance the books and boost the economy. While he will try to position the Budget as "preparing for recovery", his natural sombre style will, this time, feel very appropriate.

Economic gloom

Independent forecasters have agreed that annual public borrowing could rocket as high as £175 billion over the next two years. Public spending is set to jump to about 48% of national income, the highest figure in 27 years. With Darling’s projections likely to reflect analysts’ forecasts that the UK economy will contract by 3.7% in 2009 and grow by just 0.3% in 2010, even the most brazen politician would struggle to present an optimistic budget.

Confronting challenges

With optimism in desperately limited supply, the Chancellor’s focus must be on credibility. He needs to convince colleagues, analysts and commentators that he can tackle debt levels and begin to balance the books. But balancing the books leaves no room for many more stimulus measures or many voter-friendly initiatives. In any case, given the level of disillusionment among some business leaders following the stimulus package in the pre-Budget report, the Conservatives’ charge that the Government has “run out of ideas” will be beginning to ring in Brown and Darling’s ears.

Take public spending – currently ring-fenced until 2011, but cuts will be needed to balance the books, and reductions in spending need careful handling with the electorate. Similarly, while Darling set out tax rises in the Pre-Budget report (set to take effect in 2011), most commentators are agreed that further tax rises will be needed after the next election. Although the Opposition knows it cannot escape hard choices on tax, George Osborne has already signalled a new "austerity politics" contrasting Labour's "borrow and spend" approach with a proposed "save and invest" strategy. Under a Conservative Government, therefore, the emphasis would likely be on spending cuts rather than heavy tax rises.

Conservative criticism

The Conservatives are in a strong position, but one that is not entirely risk-free. On the surface, Darling’s dilemma is a winning situation for them – if Labour is not seen to rein in public spending, the Conservatives will attack the Government for profligacy. But there is risk involved here. Handled skillfully, a clear strategy from Labour on tax and spending could force the hand of the Tories, as Darling did in the pre-Budget report when he announced a new 45% higher income tax rate for earnings above £150,000 from April 2011. And all parties face the same economic backdrop, so the Conservatives know that, should they be successful at the election, the same choices will face them. For Labour, if David Cameron does sip champagne next summer (or earlier), they’d rather it was flat.

Key Themes

The Chancellor will be keen to create the impression that he believes the Government is preparing the country for recovery. Although he has limited room for manoeuvre, expect an emphasis on help for businesses and a focus on boosting the housing market. In a similar vein, Darling will want to present a long-term vision based on “picking winners” (even if that phrase is avoided), so focus on the green economy, media and digital, and R&D should be strong. Darling is also expected to play to Labour heartlands and traditional supporters with measures to top-up tax credits in order to support poor families and stimulate job opportunities.

Possible announcements

Rumours buzz around any budget – but tentative briefings and trailed information make it possible to make educated guesses of specifics. We set out below a more detailed breakdown of our 2009 Budget predictions.

Car scrappage scheme

There has been intense speculation that the Government will use the Budget to announce a car scrappage scheme to assist the ailing car manufacturing industry. The proposed scheme, which is already in operation in countries such as Germany and France, would provide motorists with a £2,000 incentive to trade in cars more than nine years old for newer, less-polluting models. The scheme has the backing of business secretary Lord Mandelson, but the Treasury remains concerned that it will merely subsidise exports rather than stimulating demand for UK-manufactured cars. A final decision is expected to be taken by Gordon Brown himself.

Supply-chain insurance

In addition, the Budget is expected to include details of a state guarantee scheme to underpin supply-chain insurance, following concerns that many supply chains have experienced a significant reduction in credit insurance as a result of the recession. The scheme will target small to medium-sized businesses at the heart of the UK’s manufacturing base. The scale of the scheme is yet to be finalised, but it is expected to offer guarantees short of the £5bn requested by manufacturing industry.

Green measures

Various policies have been aired under the umbrella of carbon-neutrality. The Government has already announced a £250m plan to encourage electric car use, although the workability of the initiative has already been challenged by the RAC. Brown has also suggested the Government will roll out ‘smart meters’ which measure and limit energy consumption. Heavy hints on changing the planning rules for wind-farms and large-scale renewable projects have been dropped – while clean coal projects have been talked up, with potential approval for a long-mooted Carbon Capture demonstration project.

Savers & pensioners

While modest increases in limits for Individual Savings Accounts have been trailed, Alistair Darling has been publicly critical of Conservative proposals for a more ambitious ‘savers’ budget’. He is understood to favour the idea of help for pensioners through indirect means. Gordon Brown’s influence may be telling, however, and he has been more vocal than Darling, with promises for help. As falling interest rates have reduced the cost of cutting taxes on savings, there may yet be a budget surprise for savers.

Welfare

Recession has dramatically shifted the context of welfare reform. The financial models underpinning welfare to work programmes were designed during the economic boom and additional funds are required to cope with the increase in unemployment. Brown has promised a "Budget about jobs" and announcements on skills, retraining, apprenticeships and youth unemployment are possible. However, the Government is likely to reject wide-ranging wage subsidies for employees whose working week is reduced as an alternative to redundancy.

Privatisations

Finally, it is understood that the Treasury will announce details of the privatisation of the Royal Mint, in order to ease some pressure on the public finances. Others likely to be in the spotlight include Ordnance Survey and the Met Office.