The ‘better-the-devil-you-know’ budget

This is the big dilemma that will decide the election. Spend the shock £5- £10bn undershoot on the deficit, or bank it and pay down the national debt. Darling would spend it all, and Osborne would save it all, right? Wrong.

The day that February public borrowing was shown to have reached a record seems an inauspicious one to be spending even more money to proclaim Britain’s grand economic future. But that’s what I found Lord Mandelson doing in an early visit to Ford’s famous engine plant in Dagenham. He said he was “plugging Britain in to its economic future”, as he plugged his electric car into the mains.

When I challenged him that the deficit means we might not be able to afford to spray £400m on the car industry he argues “We cannot afford not to”. The announcement that Nissan Sunderland will now host Europe’s largest electric car factory is that rare beast: a tangible outcome to the government’s stimulus efforts.

About 3,500 green jobs will be created or protected by this combination of government loans and grants, say the business department. But this is money borrowed by the government (from the Bank of England’s money printing, arguably) to then lend to foreign car companies. It is impossible to say whether it’s the right thing at this price.

For the government this is just the sort of spending, funded by borrowing, that provides an engine for the economy and eventually pays for itself. The government is already trying to point to the lower-than-expected level of unemployment to justify the £12bn VAT stimulus and the £5bn it is borrowing this year and next to fund extra job advisers, £6,000 subsidies for youth jobs, and the future jobs fund.

A recent DWP document claimed that the falling budget assumptions about claimant count from Dec 2010 (budget 09 assumed 2.44m, PBR 09 assumed 1.91m, budget 2010 will assume 1.72m according to this Treasury document released yesterday ) have already given “savings” over five years of £10bn up until December.

A further £4-5bn is likely to be announced next week, though it’s worth noting that what is gained here may be lost in higher tax credit payments, or a higher assumption about the costs of debt interest as sovereign debt yields increased post-Greece crisis. The Treasury was keen to play down its slightly less bare cupboard, pointing to departments racing to spend their budgets this month the last month of the financial year…but for now there’s room for manoeuvre.

So the government have quite some decision on their hands.

The opposition would cry foul at any attempt to spend the unemployment “saving”, as it is merely a reflection of the situation being less bad. My sense is that privately the Conservative treasury team view the £1-2bn windfall arising from the bank bonus tax as different.

They might accept that NOT being used to pay off the debt, which is rather intriguing. Team Osborne has a keen eye for sniffing out Gordon Brown’s traps. But what of the government decision?

My sense is that naked pre-election bribery is not necessarily going to work next week. People have factored in some degree of public austerity.

Instead I expect the treasury tendency to win out, and a paying down of the debt of a much higher degree than many expect. Mr Darling will then claim credit for ending the recession, falling unemployment, and debts and deficits going in the right direction.

Some method will be found to bash the banks again. And then they will ask the electorate whether even faster, deeper deficit reduction is really necessary.

As I said last month, a “better-the-devil-you-know” budget.