Budget: no stimulus, but for how long?
On a day when deflation becomes official on Britain’s most commonly watched price measure, when the IMF suggests the world’s financial system is barely a quarter of the way through dealing with $4.1tr of rotting toxic assets (and that doesn’t even include the infamous stockpile of uranium that Lehman owns), an enterprising economist might ask why tomorrow’s budget isn’t going to be the Mother of All Budgets.
At a time when the Treasury printers are running out of red ink, it’s a little contrarian, I realise, but if there’s only one lesson to learn from the credit crunch, it is this: when the political classes are in total consensus it’s best to assume they are wrong until irrefutable proof appears.
Let’s be clear. There is not going to be a stimulus tomorrow, instead some “targeted help” funded by cuts elsewhere. In fact, as things stand, Britain, uniquely in the G20, is going into a year of discretionary fiscal contraction, say the OECD and IMF.
In other words various taxes, (think VAT, fuel duty, stamp duty, national insurance, and some income taxes on high earners), are actually currently planned to go up in the middle of a stinking and historic recession. Public spending growth was already planned to be curbed greatly.
This is entirely because of the undoubtedly dire state of the public finances, specifically deficits of over 10 per cent in the coming years.
But talking to the likes of Sushil Wadhwani it strikes me that the idea of a grand US-style stimulus package has far from disappeared. Rather it’s been parked, for an opportune moment.
The former Bank of England interest rate-setter says that history shows it “irresponsible” to rule out a stimulus. In a credit crisis, it’s precisely monetary policy that may stop working. History shows you would want to keep the fiscal stimulus option primed.
The Treasury is playing “wait and see” with the Bank of England’s experiments in creating money.
As Bank of England newbie Paul Fisher today suggested: “This hasn’t been done in the UK before, so no one knows exactly how successful it will be.”
Clearly the opposition fears a pre-election Keynesian splurge in the autumn or in a year’s time. But if the green shoots continue to be trampled on, and the world economy does not fire up, the Treasury may well need to stock up on even more red ink, whoever is chancellor of the exchequer at the time.