Leader: Chancellor’s task made difficult by shortage of tools

Published on Monday 28 November 2011 00:00

RARELY can a Chancellor’s statement have come at a more crucial point in the economic cycle. The economy is on the verge of recession, driven by a global slowdown in growth caused mainly by the drawn-out sovereign debt crisis in the eurozone.

Some think that Europe’s economy is in recession already and, because Britain is so heavily linked to Europe through trade, that the UK economy is too.

Against that background, George Osborne has few tools available to insulate Britain from this chill. But he can do his best to make sure it does not turn into a freeze. Simply sticking to his plan-A programme of spending cuts and tax increases risks seeing that blown off course by rising unemployment causing falling tax revenues and increasing welfare budgets.

Giving a modest amount of cheer by announcing that he is cancelling the planned 3p per litre increase in fuel duties due in January may, in view of that background, seem perverse as it amounts to a real terms tax cut. But it should put an, admittedly, thin wrap around the economy which is suffering from a lack of demand from consumers whose budgets are under pressure from high fuel and energy costs. Many small businesses, such as tradesmen, need to use vehicles and any assistance to help keep them going would be welcome.

Reports suggest that Mr Osborne is not, however, planning to extend his timetable of deficit reduction. The argument may be that as the sovereign debt contagion is spreading through the eurozone, to infect even large and apparently healthy economies such as France’s, sticking to the deficit-cutting targets is essential to reassure the financial markets on which Britain depends for its borrowing. Diverting from them could well see Britain’s borrowing costs, which have to be paid by the taxpayer, rise, necessitating further cuts in public spending.

Thus it is being reported that he may finance the fuel duty tax cut by not increasing welfare payments by as much as planned. That may be unwise. People in receipt of welfare mostly depend on it for daily necessities and any less than inflationary increase runs the risk of cancelling out the economic benefit of a fuel tax reduction by reducing the spending power of the poor. At the individual level, hardship will be caused; at the macro-economic level, net consumer demand will be unchanged.

Demand, however, will be boosted, it appears, through the reappearance of privately financed infrastructure construction projects. Mr Osborne seems to have succeeded in persuading a number of pension funds to invest in major road, rail, and energy projects. He apparently has a £50 billion list of such schemes.

Critics will claim these will be expensive and ultimately add to taxpayer liabilities, either through higher borrowing costs, as pension funds will demand a secure return for their pension holders, or though the imposition of user charges such as tolls on new roads.

Against that, it can be said that desperate times need desperate measures. In Scotland, the political intrigue will be whether the Scottish Government will overcome its opposition to private finance and possibly tolls, to seize the opportunity for the boost to the Scottish economy that it has been demanding.

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