Darling holds off cuts with eye to election

Alistair Darling’s pre-Budget report could be seen as the opening salvo in next year’s general election campaign. It will give Labour grounds for claiming it is still investing in the economy and avoiding the urge to prematurely cut spending.

The evidence is in the numbers. As shocking as it may be, the budget deficit this year will turn out to be a little larger than expected at £178bn. Next year, despite the need to cut, it will remain at £176bn. Only in 2011 will it start to fall significantly and by 2013 it will be £96bn – providing everything goes to plan. Darling is therefore giving Brown the only platform that he can to campaign on next year: Labour is managing the economy better than George Osborne who, Labour will claim, would have taken an axe to public spending and derailed the recovery.

The PBR saw measures to support business, but none of those will produce any serious effects for the next three to four years – roughly the same time during which changes to National Insurance should have raised an additional £6.5bn and a freeze in the inheritance tax rate should have brought in half a billion. The pain here, in cuts and tax rises, is delayed.

There will be much speculation over whether the chancellor’s forecasts are correct. A big economic shock somewhere in the world could easily throw them off course and the leap from 1.5% growth next year to 3.5% in 2011 still looks rather optimistic. Q3 of this year saw the economy shrink by 0.3%. The total fall since 2008 is around 5.9%. But in the face of mounting criticism over the budget deficit Darling looks brave in holding firm. It may be enough to narrow the gap between the Tories and Labour in the polls a little further. But is his timing right for the economy? The economists still have much to debate.