Labour opted for the middle course against the most difficult budget backdrop since it came to power, of an unabated global credit crisis, slowing economy and public finances approaching their limits, Andrew Smith, KPMG chief economist, notes.
The chancellor was faced with ‘the dilemma that tax cuts would support growth but blow the fiscal rules apart, while tax increases might improve the public finances but de-rail the economy in the process’ and in response presented a broadly neutral budget.
‘The economic outlook is extraordinarily uncertain as no-one knows how long the credit crisis will last or how much damage it will do. Blaming the credit crisis, which he referred to on 14 occasions during his speech, the chancellor downgraded his growth forecast but stuck to the view that 2008 will be the bottom, with growth picking up from 2009,' Smith said.
‘Mr Darling acknowledged that slower growth means higher borrowing in the short-term, but promised to meet the golden rule over the cycle by donning the hair shirt later. Unfortunately, even after five years of solid growth – as good as it’s going to get – the government is still borrowing some 3% of GDP in 2008-09. So the hair shirt will ultimately have to be pretty tight.’
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