Darling: Recovery will be as rapid as recession

Published on Tuesday 21 April 2009 22:08

ALISTAIR Darling will today insist that Britain's economic recovery will be every bit as sharp as its downturn, which has seen the country plummet into the worst recession since the Second World War.

On the day that new figures are expected to show unemployment heading towards the three-million mark, the Chancellor will use his second Budget to sound a cautious but optimistic note, while targeting help at safeguarding jobs.

But he will also emphasise the need for the country to live within its means by demanding 10 billion of efficiencies across Whitehall, as government borrowing soars to 160 billion, to avoid "choking off" the recovery. A year ago, he forecast borrowing of just 38 billion.

Mr Darling will present his Budget the day after deflation returned to Britain for the first time in almost 50 years.

Treasury insiders believe that the graph of Britain's downturn and recovery will be V-shaped rather than U-shaped, meaning that they expect the country to bounce back quickly from the current slump.

Budget giveaways will be limited, and are likely to include the stamp duty "holiday" on house purchases up to 175,000 being extended until Christmas, as part of a 1 billion boost to the housing market.

Drivers could be offered 2,000 incentives to trade their old cars in for new vehicles. Tax relief on pensions could be limited to help to pay for the incentives.

But Mr Darling will be forced to eat humble pie and admit that previous growth figures were wildly optimistic. He will predict that the economy will shrink by about 3.5 per cent this year and begin a modest recovery – which could take a decade to complete – after Christmas.

The UK government has nationalised Bradford & Bingley and Northern Rock and taken majority stakes in Royal Bank of Scotland and Lloyds Banking Group, formed when HBOS was taken over by Lloyds TSB.

The government has no intention of selling its shareholdings in the short term, and hopes it has seen off the worst of the banking crisis, though further "aftershocks" – such as the collapse of the Dunfermline Building Society – are expected.

Labour MPs will also be watching the Budget closely for signs an economic recovery could save them from defeat at the next general election.

Yesterday, an Ipsos Mori opinion poll gave the Conservatives a 13-point lead over Labour. And a survey by pollsters ICM found that Mr Darling and Mr Brown had lost their status as the best team to lead the UK through the recession, with 45 per cent now preferring Mr Osborne and Tory leader David Cameron against 35 per cent for the Labour team.

Despite the bleak figures, Mr Darling is known to remain optimistic the country is in a strong position to pull through the recession. However, he is expected to admit that the UK's recovery is at the mercy of world events.

The Treasury's finances have been wrecked by the collapse in stamp-duty receipts – it collected about 7 billion less last year than in 2006-7 – and by the absence of profits from major firms such as RBS.

But Mr Darling and the Prime Minister maintain that cutting public spending in a downturn would be the wrong thing to do. They have pointed to Tesco's announcement of record pre-tax profits of 3.13 billion as evidence that the cut in VAT to 15 per cent is making its presence felt in the high street.

"Just this morning, we have seen the impact of the VAT cut on the retail sector," Mr Brown's spokesman said yesterday. "But we must also ensure that through the downturn we continue to invest for the future, while ensuring that the public gets value for money. That will be a theme of the Budget."

Today's unemployment figures will increase ministers' worries the jobless total will break three million next year. The total already exceeds two million, and there is growing concern that hundreds of thousands of school leavers and university graduates will be unable to find work this summer.

Liberal Democrat Scottish spokesman Alistair Carmichael called on Mr Darling to bring forward a shake-up of the tax system to help families on low incomes. The Lib Dems have suggested raising the tax-free allowance to 10,000, providing a 705-a-year boost to most families.

Mr Carmichael said: "A key priority for Alistair Darling must be to rebalance the tax system so that the rich pay their fair share and hard-working families are given more money in their pockets."

Meanwhile, estimates by the International Monetary Fund (IMF) that the cost of the UK banking bail-out could be 200 billion were rejected last night as the Treasury forced the body to retract the figure.

A government spokesman said that the figure was heavily exaggerated and reflected the financial sector's total exposure, not just the governments.

He added the IMF had also failed to give a range of potential costs. Reports have suggested that Mr Darling's own estimate will be closer to 60 billion.

The IMF last night had removed the figure from its website. No-one from the IMF was available for comment.

BOOZE, BUDGETS AND BRIEF CASES

TWENTY things you may not know about Budgets:

1 The word comes from the French "bougette", a little bag – hence the Chancellor's case.

2 The original scarlet briefcase was made for William Gladstone.

3 James Callaghan was the only chancellor after that to abandon the red case.

4 When Norman Lamont was chancellor in the early 1990s, his case contained a bottle of whisky, some of which was to be drunk as he delivered the speech.

5 The longest speech was four hours and 45 minutes, by Gladstone.

6 The shortest was by Benjamin Disraeli in 1867: 45 minutes.

7 Parliamentary reporter Sir Alexander Mackintosh sat through 60 Budgets, from 1881 to 1941.

8 Chancellor George Ward Hunt arrived at the Commons in 1869 to find he had left his speech at home.

9 Nigel Lawson had two mishaps during his period as chancellor. One Budget was suspended after the SNP intervened. Another year, Mr Lawson's staff put the pages in the wrong order.

10 Derick Heathcoat-Amory had one of the best Budget one-liners: "There are three things not worth running for – a bus, a woman or a new economic panacea. If you wait another one will come along."

11 Hugh Dalton leaked parts of his 1947 Budget to a reporter. But news of a penny on a pint of beer was printed in the paper before Mr Dalton had reached that point in his speech. He resigned.

12 Jimmy Thomas, a member of the 1936 Cabinet, was playing golf with a City man. With a wink, Mr Thomas said: "Tee up!" The City man took the hint and insured himself against an increase in the tax on tea.

13 John Major's Budget in 1990 was first to be televised live.

14 Sir Geoffrey Howe, named his dog Budget.

15 Winston Churchill drank brandy while delivering the speech.

16 Hugh Dalton relied on milk and rum.

17 Selwyn Lloyd had whisky and water.

18 Hugh Gaitskell drank orange juice and rum.

19 Harold Macmillan drank tap water.

20 The chancellor is the only MP allowed alcohol in the chamber.

Bill Jamieson: Be more ambitious and get cutting

FIRST, the Chancellor must discard the cynical optimism of last November's pre-Budget forecasts and give a straight-talking appraisal of where we are. Understatement of the depth of this recession – and its length – only sets us up for further disillusion and failure.

With unemployment heading for three million there is a case for time-delayed measures. But the Chancellor must tell it how it is on the public finances and make clear beyond doubt why action has to be taken on public spending and tax. Public confidence will be bolstered, not weakened, by plain speaking and by a credible three-year plan of action.

The real heavy lifting must be done through public spending reduction – and tax cuts for business and enterprise. Darling needs to send a message to the world that the UK intends to run its finances properly. That is the mood we need now.

Talk of 15 billion of "efficiency savings" – barely 2.6 per cent of the spending total and 5 billion of which has already been announced – doesn't begin to cut it.

The target has to be much more ambitious – in the order of 30 billion. Prestige defence projects such as the new navy carriers and the Eurofighter need to be rethought. Payments of child benefit and winter fuel allowance to higher-rate taxpayers can be axed.

And real savings must be made in day to day public spending. We cannot have a two-nations Britain where the public sector is sheltered with continuous real terms spending increases while the private sector is left to go the wall.

There should be pay freezes at the top of the civil service and local authorities, a swingeing cull of the quangocracy and a recruitment freeze on those diversity awareness monitors and stress counsellors. Action should also be taken to begin the transition from public sector pensions to defined contribution schemes.

George Kerevan: Honesty best policy in this Titanic task

CAPTAIN Darling is on the bridge of the SS UK Economy, there are icebergs all around and the lookout has lost his binoculars. The best advice I can offer Alistair is to be utterly honest. His Pre-Budget growth forecast of last November – a modest downturn in early 2009 then back to normal in the second half of the year – was so risible it had the markets laughing.

Now we are headed for wartime levels of borrowing. Anything the Chancellor does that frightens off lenders could sink the pound, raise interest rates; and lead to the government having to fund itself through Zimbabwe-style hyper-inflation. Tell the horrible truth Alistair and don't spare the pain.

How do you plug the black hole in the UK accounts without stifling incentives or slashing public spending during a recession?

One solution is to raise VAT, which is due to return to 17.5 per cent in December. Going to 18.5 per cent would raise an extra 5 billion a year.

For businesses: a genuine (and simple) scheme to help companies who are finding it difficult to get credit insurance. And scrap the daft notion of charging rates on empty property.

For savers: abolish 20 per cent tax on the interest on savings.

For the environment: stop footering with gimmicks such as the subsidy to buy electric cars (powered down the wire by nuclear reactors).

We need a carbon tax that creates genuine incentives for new, 'green' industries. And a recession-busting programme to build a North Sea electricity grid to take Scottish renewable energy to Europe.

For Scotland: The North Sea desperately needs fiscal incentives to boost oil output (which will actually help raise tax revenues). And no more Treasury 'efficiency savings' imposed on the Holyrood budget – they're another name for cuts.