Bill Jamieson: Brighter news gives Darling ray of hope

Published on Saturday 20 March 2010 12:43

IN BUSINESS as in politics, what a difference a week can make. Ahead of the Budget on Wednesday, Chancellor Alistair Darling looks set to benefit from a distinct change in mood over the past seven days.

The latest figures on government borrowing have come in less high than feared. Unemployment, at least on the claimant count measure and not in Scotland, showed a fall for the third month in a row. And on the stock market, shares have continued to scramble to a 17-month high.

So might the Chancellor avoid a humiliating climbdown and get away with economic forecasts dismissed as wildly optimistic this time last year? And could he even produce a rabbit out of the hat by way of a reduction in budget deficit forecasts that could leave the Conservative party stripped of its central critique of the government's position?

Prospects are looking brighter at the UK level, though for Scotland the picture remains notably bleak and is not helped by an unconvincing recovery plan from Scottish Government economists.

Certainly, the better news flow at the UK level should enable Mr Darling to present a Budget altogether more hopeful in tone than seemed possible when the date was announced. And that mood of improving hope may also be starting to work on business confidence.

He will also be able to point to improved prospects for the world economy – critical for UK exporters if they are to take advantage of the 27 per cent fall in sterling since the onset of the global financial crisis.

Figures for the first quarter point to a further strengthening of recovery and good progress for 2010 overall. While economists at Barclays Capital have lowered their GDP growth forecasts for the Eurozone area from 1.5 per cent to 1.1 per cent, they have upgraded their forecasts for the US, Japan and emerging Asia.

All this is unlikely to do much to lift economic growth immediately in the UK. First-quarter figures for GDP, due out on 23 April – less than a fortnight ahead of the likely general election on 6 May – are set to reveal an economy still struggling to gain traction into recovery. Indeed, it would not be surprising if the economy is seen to relapse into recession after the feeble crawl back to growth of just 0.3 per cent (revised up from 0.1 per cent) in the final quarter of 2009.

In the Pre-Budget Report (PBR) last December, the Treasury estimated growth in 2010 of between 1 per cent and 1.5 per cent after a 4.5 per cent plunge in 2009. Independent forecasters broadly concur with this view. It is on prospects for 2011 and beyond on which opinions differ sharply.

Most independent economists believe the Treasury's PBR forecast for 2011 of growth of between 3.25 per cent and 3.75 per cent is far too optimistic.

The Treasury view is broadly that by the third and fourth quarters of this year, stronger household spending, bank lending to business and a recovery in business investment should be working to close the gap between the Treasury and the independent commentariat on prospects for 2011 and beyond. It is not an unreasonable argument. However, there is much room for dispute over the reduction in output caused by the recession and the permanent damage to productive capacity that may cause the Treasury to be highly disappointed in its projections both for growth and for tax revenue recovery in future years.

Up till now, the Budget "call" has been seen as an either-or between tackling the deficit and allowing the economy to recover. But in truth, a budget that is seen to be tackling the deficit is as likely to lift the business mood as one which maintains a "hands-off" policy so as not to damage the recovery. People will fear that difficult decisions have simply been postponed, and that uncertainty will plague the markets. But Mr Darling now looks to be in a stronger position than seemed possible to present progress in deficit reduction without slashing spending.

How so? First, the figures last week for government borrowing in February were better than expected. The PBR forecast for the Public Sector Net Borrowing Requirement (PSNBR) was 178 billion. Now, after two better than feared months of real figures, the Chancellor looks on course to be able to announce a PSNBR of between 155bn and 165bn – still a peacetime record as a percentage of GDP, but distinctly better than expected.

And that, carried through into future years, could enable Mr Darling to pull a rabbit out of the Budget hat this week – specifically a near 100bn reduction in the Treasury projection of the borrowing requirement over this and the next four years. Indeed, economists at HSBC believe that he may get away with borrowing as much as 133bn less than he predicted in the December PBR.

Suddenly, budget deficit reduction on the scale required appears altogether less daunting and the cuts in public spending less Draconian. More immediately, Mr Darling could now be in a position to do much to spike the guns of the Conservative opposition. However, the credibility of the budget deficit recovery profile on Wednesday critically hinges on achieving the growth forecasts on which the budget is based – and most independent economists are reckoning on growth no higher than 2.5 per cent for 2011, against the 3.25-3.75 per cent set out in the PBR. Mr Darling will be loath to lower it for fear of unravelling his deficit reduction story.

For Scotland the outlook is not promising. Independent economist Tony Mackay forecasts GDP growth of just 0.8 per cent in 2010, rising to around 2 per cent in 2011. His monthly commentary is more notable for its scorching attack on the Scottish Government's 50-page Economic Recovery Plan – "a disappointing document, like earlier versions. It is not really a recovery plan but more a mixture of pseudo-academic jargon and a long-term wishlist. John Swinney and his government colleagues deserve better than this."

Mackay's specific criticisms are that short-term actions are almost completely absent from the plan and that the analysis glosses over key issues such as the need for substantial reductions in public spending and the restrictions under which the Scottish Government operates.

The much-trumpeted acceleration of capital projects accounts for just 1 per cent of total Scottish Government spending, while the employment growth figures cited in the Recovery Plan, including, for example, the creation of more than 800 manufacturing jobs and more than 750 finance and business services jobs "seem unbelievably high".

He says the plan overall has "very little substance" and ends by expressing the hope that after the UK general election Mr Swinney "will insist that the economists in the Scottish Government produce a recovery plan which can actually be implemented".

Mr Mackay as an economist must know what a tall order that is. But that is his published critique. I do not invent it, I only report it, and I look forward to the administration's response with interest.