Darling: No tax cuts and no more money

Published on Friday 6 November 2009 21:46

CHANCELLOR Alistair Darling has given a clear signal that he will not inflate government spending further with a fresh "fiscal stimulus", as he begins the task of hauling down Britain's deficit of £175 billion.

In an interview with The Scotsman ahead of a G20 meeting in St Andrews today, Mr Darling suggested that, while he intended to increase public spending by 30bn next year, an extra fiscal stimulus this autumn on top of that was unlikely.

Instead, he said he needed to strike a balance between supporting the flat-lining UK economy with continued government cash and getting the country's huge fiscal deficit back under control.

The Chancellor's move comes after reports earlier this week which suggested that Gordon Brown wanted to unveil a further multi-billion-pound spending spree to support the faltering recovery.

Mr Darling is preparing to unveil his pre-budget report in the next few weeks, when he will set out the government's fresh spending plans. Last year, the Chancellor unveiled a 16bn fiscal stimulus before Christmas. This included the cut in VAT, which ends in the new year.

Mr Darling said many of the government's existing measures, such as the car scrappage scheme, would continue next year as public spending rose to support the economy.

But asked whether there was room for an extra fiscal stimulus on top of that, he said: "I don't think people are talking in terms of extra stimulus. What they are talking about is making sure that we continue to support our economy."

He continued: "The stimulus was needed 12 months ago, and that money is in the economy. It's having an effect, it's working its way through. It takes time. I'm anxious that we maintain that support for our economy, but I'm also anxious, and I've been clear about this for a year now, that there are two parts to the strategy – support now, but also making sure we get our borrowing down."

Mr Darling's aides last night said the details of the pre-budget report were still to be decided, and added that the Treasury was committed to giving continued support to the economy.

But his comments suggest that the Treasury is nervous of a fresh "spending splurge" when borrowing has already reached record levels. Any marked increase to that borrowing could unnerve financial markets and pour fresh doubts on the UK's ability to service its vast debts.

The Chancellor said the economy was still in a "fragile" state, adding: "We're not out of the woods yet." It was now the task of government to ensure that the recovery of the UK economy was on a firm footing.

He continued: "You need to establish that once the recovery is started it is firmly established. Then you do need to make sure you rebuild your position."

Mr Darling also indicated that, had the Bank of England not injected some 200bn of cash into the economy since the summer through the controversial policy of quantitative easing, then deflation would have been a real possibility.

"If that money wasn't in the economy, credit would have been more constrained and there would have been a great risk you would see deflation," he said.

Mr Darling will today host the meeting of the G20 finance ministers, where they are set to discuss plans for long-term growth and a deal on climate finance.

In a speech last night, he said it was vital for the G20 nations to continue to "support demand and repair the financial system".

"We cannot yet be sure the global recovery has sufficient momentum to be sustained and durable," he warned.

"Once we are through this, we must co-ordinate our plans for the recovery, just as we have co-ordinated our response to this crisis."

Mr Darling was backed last night by a report from the International Monetary Fund, which warned G20 group members that they should not choke off emergency support for their economies too quickly.

"One of the key lessons from the experience of similar crises is that withdrawing policy stimulus too early can be very costly, particularly if the financial system remains vulnerable and prone to adverse shocks," the IMF paper said.