Labour opted for the middle course against the most difficult
backdrop since it came to power, of an unabated global credit crisis, slowing
economy and public finances approaching their limits, Andrew Smith,
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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