Pre-budget report: Alistair Darling's jumbo deficit deception
The pre-budget report glossed over how the government will cut Britain’s huge debts. The consequences are alarming
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Alistair Darling's pre-budget report appeared to be a bland compromise
Yvette Cooper entered the cabinet room at No 10 on Wednesday morning shaking with rage. The work and pensions secretary had been up until the early hours arguing with Alistair Darling, the chancellor, over his plans to make cuts to a new pension scheme designed to help low-paid workers.
Cooper had argued that helping core Labour voters who were worried about their retirement was more important that saving £1.5 billion for the Treasury. Finally, at 3am, she went to bed, believing she had successfully fought off the Treasury’s demands.
A few hours later, however, Cooper woke to newspaper stories which declared that the chancellor had made the “tough choice” to delay the pension scheme and adding that her department was a “non-priority” ministry.
Cooper sat in silence as the chancellor briefed the cabinet on the pre-budget report he was due to deliver to the Commons that afternoon.
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Finally, when it was her turn to speak, she accused Darling of making “astonishing” mistakes in not considering other methods of raising money. He had, she said, decided to attack a scheme that would not only save the government money in the long term, but also might help Labour to win votes at the next election.
She concluded with an extraordinary outburst directed at the chancellor: “Why do you have to be so macho?”
Macho is an odd adjective to describe the grey, managerial Darling. This was especially true last week when, far from being tough, his pre-budget report appeared to be a bland compromise which neither set out political dividing lines with the Conservatives nor made a serious attempt to control the growing black hole in the national accounts.
In the words of one former Labour cabinet minister: “It was neither fish nor fowl. It was playing to two audiences — the financial markets and the British electorate — and ended up impressing neither.”
Gordon Brown may not have been entirely dismayed by the revival of public interest in MPs’ abuse of their expenses which came after the publication on Thursday of their claims for 2008-9.
The prime minister would have been embarrassed at the disclosure that he had paid back the £500 he had charged for painting a summerhouse at his constituency home. But the revelations distracted from the somewhat larger repayments for which he is responsible — those on Britain’s £178 billion budget deficit.
This yawning gap between the amount the government spends and the amount it has coming in was addressed only fitfully in Darling’s statement. Both he and Brown know, however, that it will have a critical effect on the provision of public services and the performance of the wider economy for years to come.
“This was a deceitful budget,” said Philip Hammond, the shadow Treasury chief secretary. “Gordon Brown has put political expediency above the national interest and sound economic management.”
As analysts sort through the fine print, are the accusations that it was a “buck-passer’s budget” correct and, if so, what are the political and economic consequences?
IF the pre-budget report was about securing Labour’s electoral interests, it was concocted by a peculiarly divided party leadership.
Cooper’s fury highlighted just how ill-tempered the relations between members of the cabinet had become in the run-up to last week’s report.
This weekend a close colleague of Cooper’s insisted that “while there were robust discussions between officials, Yvette was completely happy with the agreement she and Alistair reached on savings”.
However, Cooper’s row with Darling was just the tip of the iceberg. Brown and his chancellor are understood to have battled over most key elements of the report.
Indeed, such was the hostility between them that, according to Whitehall sources, the prime minister did not even have a face-to-face meeting with Darling until about 10 days before the statement.
The disputes started with the economic forecasts — Brown wanted them to be optimistic while Darling pushed for them to be realistic. Then there was a fight over which taxes should be raised. The Treasury suggested an increase in Vat, while Brown preferred a rise in National Insurance contributions. The reckoning was that people are less likely to notice an extra 0.5% coming off their payslips than extra Vat at the tills.
Finally there was the clash over the elephant in the room — the budget deficit. The Treasury wanted to issue a clear blueprint explaining how the nation’s debt would be controlled. With a general election on the horizon, No 10 feared the voter backlash if Labour was honest about where it would cut public services or raise taxes to fill the gap.
Darling gave a hint as to the fury of the debate yesterday. In an interview he admitted: “There can’t be a relationship between a prime minister and a chancellor where there aren’t healthy tensions ... sometimes unhealthy tensions.”
It was not just Brown and Darling who were at each other’s throats. The prime minister had the support of Ed Balls, the schools secretary who is his favoured successor. Balls is a keen proponent of fiscal policy being used to produce “dividing lines” with the Tories ahead of the election — which essentially involves portraying the opposition as a group of gleeful cutters who will protect the interests of their wealthy friends rather than the public services.
Backing up Darling was Lord Mandelson. The business secretary was reportedly angry that the chancellor was being prevented from outlining how the government intended to get the public finances back in order. He was also keen to protect the competitiveness of the City.
What emerged from this battle is only becoming apparent this weekend.
First up for Darling on Wednesday was a purely populist measure and a victory for the Brown-Balls camp. Darling announced a one-off 50% tax on bankers’ bonuses of more than £25,000, a measure which it was estimated would raise £550m. This was a straightforward punishment for banks for continuing to pay huge sums to employees despite having brought the financial system to its knees last year.
Rarely can a new tax have been so popular. Today’s YouGov poll for the Sunday Times shows that nearly four-fifths of voters, 79%, back it.
However, analysis of the tax suggests it might actually lose money for the exchequer. In the absence of the tax, say economists, bonuses would have been significantly larger and the bankers receiving them would have paid 40% tax. Now, with banks working to reduce or defer bonus payments, the income tax take will suffer, perhaps to the tune of £300m.
Darling followed this up with a simple piece of political positioning. He announced that he would not be lifting the threshold above which inheritance tax would be paid — as had been planned — leaving it at £325,000. This was a move designed to portray the Conservatives as the party of the wealthy. David Cameron, the Tory leader, remains committed to introducing a £1m threshold for the tax.
Then came the surprises. Darling had clearly lost his battle with Brown over Vat and announced that he would be doubling the planned increase in National Insurance in April 2011 to 1%. This would raise an extra £3 billion a year but drew howls of protest from business, which said it would be a tax on jobs.
Richard Lambert, director-general of the CBI, said Darling had made a “serious mistake” by imposing the tax, which would threaten the economy’s fragile recovery. Businesses, he said, would think twice about taking on new people.
The Tories also gleefully pointed out that this would affect anybody earning more than £20,000 a year and promised to reverse it.
As Darling continued with his shopping list of measures, his audience could have been forgiven for thinking that the meat of the speech was going to come — the explanation of how he was going to cut the deficit. At £178 billion it is almost double the previous record and more than an eighth of Britain’s gross domestic product.
Treasury sources maintain that all through the battles ahead of his report, Darling insisted that the government should stick to its commitment to halve the deficit over the next few years. “Through it all, this was his bottom line,” said one. “Alistair’s big priority was to make sure we halved the deficit.”
Indeed, Darling announced that this would happen: by 2014-15, he claimed, the deficit would be down to £82 billion. However, the fine print showed a more disturbing reality.
A pledge to limit public sector pay settlements to 1% a year in 2011 and 2012 drew the predictable angry reaction from public sector unions which said their members would resent suffering for the “folly of the bankers”. The fact that Darling had squeezed public sector workers suggested the chancellor meant business.
However, he then announced that he was ring-fencing 95% of the health budget from real cuts, guaranteeing “front-line” spending on schools and police numbers and giving half a million extra children free school meals. All of which meant the chancellor had actually added £15 billion to his spending totals.
Instead of this being a statement that raised taxes to cut the deficit, it was an old-fashioned tax-and-spend budget, straight out of the Brown playbook. The purse-strings were not being tightened but loosened.
Analysts were aghast. “The PBR [pre-budget report] does not establish a credible and detailed plan to return from the UK’s huge structural fiscal deficit to a sustainable path,” said Michael Saunders, an economist with Citigroup.
“The tax hikes raise relatively modest amounts of revenue and are all absorbed by additions to the public spending totals.”
Barclays, in a note to its clients, said: “Given the large amount of adjustment that is likely to be needed to bring the public finances under control, we do not find this reassuring.”
Despite the measured tones, this reflects a harsh assessment which has direct consequences for Britain’s finances.
Although understandably reviled in many quarters, the banks play a crucial role in keeping UK plc afloat by buying and selling the government bonds, or gilts, that allow the country to run at a deficit.
If investors are not convinced that the government is taking the right measures to get the deficit under control, then the government’s cost of borrowing money will go up. When the amount being borrowed is hundreds of billions, even the smallest changes add up to big numbers.
Yet despite backing away from the big issue, Darling had time for plenty of small measures. One was a so-called scrappage scheme for domestic central heating boilers, similar to the successful car scheme, although it will cover only 125,000 new boilers. Another, a sop to pensioners, was a cut from 22% to 20% in the tax on bingo.
City dealers expecting radical action to cut the deficit were astonished to hear the chancellor dwelling on inconsequential detail. So were some listening in the Commons.
“What we needed was a national economic plan but what we got was a weak party manifesto,” said Vince Cable, the Liberal Democrat Treasury spokesman. “There has never been a deficit like this and the chancellor has ducked the hard choices on spending and cuts.
“Instead of facing up to reality he has chosen to move the goalposts by relying on fanciful growth forecasts.”
The consequences are stark. In a stumbling interview the day after his statement, Darling struggled to explain how departments would be able to retain their promised “flat” budgets when the government was so hard-pressed.
Analysis by the independent Institute for Fiscal Studies said Darling’s figures suggested a “severe squeeze” in the public services outside the chancellor’s priority departments.
Robert Chote, its director, said: “Once we take into account the announcements of real spending growth on frontline NHS, schools and Sure Start [a scheme for hard-pressed parents] for 2011–12 and 2012–13, other departmental budgets are likely to need to shrink by 5.6% a year on average over three years — a little under 16% in total.”
If Darling continued to protect health and schools into a third year, the cut would amount to 6.9% a year in real terms, lopping a fifth off the so-called “non-priority” budgets. A measure of what the impact of such cuts could be is that among the departments affected are those responsible for defence, higher education and transport.
Treasury officials did not dispute the IFS’s calculations, which also showed that most of the extra tax from the measures announced last week will come from the top fifth of taxpayers.
The IFS suggested that, assuming the economy picks up as the Treasury predicts, there will still be £76 billion to be found to balance the books by 2017-18 — or £2,400 a family.
CAMERON boasted a grin as broad as Cheshire cat as Darling finished his statement.
“They’re geniuses,” he said sarcastically to colleagues afterwards. “They funked it. They had the opportunity to show they took the deficit seriously and they funked it.”
As the Tories predicted, the chancellor’s statement has indeed unravelled. But despite the gaps in the numbers there were signs this weekend that Brown may have got away with it — just.
The gilt markets wobbled, but the all-important credit ratings agencies are not, as some feared, about to downgrade Britain.
More worryingly for the Tories, the pre-budget report has been a qualified hit with voters. Today’s Sunday Times/YouGov poll shows that the Tory lead has narrowed from 13 to nine points, close to the level at which the Conservatives might be denied an overall majority. Voters expressed cynicism about Labour’s motives, but they were almost as dismissive of Osborne, the shadow chancellor (see panel on opposite page).
For all the rows within cabinet, Labour has emerged with a settled strategy on how to fight the next general election: promising to safeguard public services against Tory cuts overlaid with class war rhetoric that the opposition stands for the privileged few. The aim is to galvanise the core support to get their share of the vote back up to the mid-30s and try to make a fight of it.
The Conservatives, by contrast, remain confused about their messages. Some in the Cameron high command want to fight on public services, claiming that Tory reforms would improve schools and hospitals. Others want to employ a “value for money” strategy, saying that getting the deficit under control is key.
“It comes down to whether we target ‘Holby City woman’ — the archetypal public sector worker — or ‘Asda mum’ who is more worried about the pennies in her pocket,” said a Conservative strategist.
Privately senior Tories acknowledge that there is little appetite for their message about the need for deep spending cuts. But Osborne believes that an election victory without a clear mandate to cut the deficit is not a victory worth having. The theory is that a Tory government would struggle to survive more than one term if it imposed cuts without having “levelled” with the public prior to an election.
That election may happen earlier than previously thought. Conventional wisdom has held that Brown would call a ballot on May 6. Now many Labour MPs believe he could instead go for March 25.
The argument goes as follows: the pre-budget report has set out as much detail about tax and public spending as Labour is prepared to offer. A May election would mean there would have to be another budget statement before the country goes to the polls, at which time Labour would be put under huge pressure to come clean about which “non-core” services it would cut. It might be tempting therefore for Brown to call an election early to avoid the need for the chancellor to be put on the spot.
The Tories are taking these rumours seriously. All leave has been cancelled for campaign headquarters staff from the end of January.
In the meantime, Brown will continue to assert that he is making the “tough decisions” needed to drag Britain out of recession — while his critics will point out that he has not actually explained what those decisions are.
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