John Humphrys: Darling’s Package – Prudence or Electioneering?

This post also appears on my colleague John Humphrys’ YouGov Blog

Chancellors of the Exchequer always have to be high wire artists. In essence their job is to balance economics and politics. But seldom can a chancellor have had a more difficult balancing act to pull off than Alistair Darling did this week. That’s because both the economic predicament the country finds itself in and the political prospects for the Labour government, facing an election in months, are so dire. The question is whether his pre-budget report, delivered on Wednesday, matched the demands of each or whether one was sacrificed for the other.

Labour’s political woes are clear enough. The party is languishing at below 30% in the polls, on average a good 10% behind the Tories. Although the gap has been narrowing a little recently, and although the party enjoys a built-in advantage in the way the voting system works, few Labour MPs are confident that they have much chance of holding power after the next election which has to be called by June.

The economic predicament is acknowledged by everyone to be dire. The chancellor announced on Wednesday that this year the economy will shrink by 4.75% — the worst year since 1921 or, in other words, a worse fall in output than in any single year during the great depression of the 1930s. Britain’s is the only major economy that was still shrinking during the third quarter of the year. The government’s finances are in a similarly dreadful state. During this financial year the government will have to borrow £178bn, or 12% of national income, the worst fiscal deficit in British peacetime history.

Mr Darling made clear what he took his task to be. It was, in the short-term, to do everything to sustain economic recovery while in the medium term to set out a credible plan for sharply reducing the government’s dependence on borrowing. He wants the annual deficit to be cut by half by 2014. So how well did his measures fit this task?

The tax rise that got the most headlines was the widely-trailed tax on bankers’ bonuses. All bonuses over £25,000 will be taxed at 50%. It’s probably the most popular tax ever introduced (except among bankers). Public outrage at banks continuing to pay huge bonuses even after many of them have had to be bailed out by the taxpayer meant that the chancellor had to do something.

But in relation to his larger task the move is largely irrelevant. The tax will raise only £550m at the most; banks may try to get round it by paying the bonuses as salary instead; and in any case the tax will be applied only for five months. So some banks may just sit it out and pay up later. Nonetheless, some in the City are squealing and warning that many bankers will up sticks and do their business elsewhere, so jeopardising future tax revenues.

On the bigger picture Mr Darling was adamant that he would do nothing to harm the fragile prospects for growth in the next year. His earlier temporary measures to boost growth, by cutting VAT and providing a stamp duty holiday on house purchases, come to an end anyway at the end of this year. So not only did he postpone his belt-tightening plans till 2011 but he said he would go ahead with his plans actually to increase public spending next year.

Cynics will note that although this was justified in terms of protecting economic growth it also suits Labour’s electoral needs: impose the pain only after the election.

And pain there will certainly be. From 2011 3.9m public sector workers will have their pay increases capped at 1% even though inflation may by then be quite a bit higher. The government’s contribution to their pensions pot will also be hit. On public spending after 2011, the chancellor said that ‘frontline services’, especially in education and health, would be protected, though no one seems to know quite what ‘frontline’ means. But he was silent on how the axe would fall on other spending departments. Independent analysts believe that areas such as housing, transport and higher education are likely to hacked by between 10% and 15%.

But perhaps the most significant delayed kosh was the announcement that national insurance contributions would increase by a 1% point (half of it previously announced) from 2011 for everyone earning over £20,000. The Tories said they would strive to avoid this. The shadow chancellor, George Osborne, said: “Now we know what Labour’s class war means – a tax on anyone earning over £20,000”. Another Tory, echoing an old Labour soundbite, said it was “a tax rise on the many not the few”.

Others attacked the move as a tax on jobs. Richard Lambert, the director general of the CBI, said: “The chancellor has made a serious mistake imposing an extra jobs tax at a time when the economic recovery will still be fragile. Increasing national insurance contributions will hold back job creation and growth.”

But if Labour’s response to our economic plight is open to criticism, what about the Tory response? Their view is that an attack on the deficit needs to be made more quickly. They argue that without a more credible plan to reduce Britain’s borrowing needs there is a real danger that the country will lose its top triple A credit rating in the financial markets with the result that interest rates will have to rise more than they would otherwise in order to persuade others to lend to us. That itself, they say, would harm growth.

For the moment the markets seem to have responded calmly to the chancellor’s package so that there is no immediate risk of Britain following the path of Greece, which earlier this week had its credit-rating cut. But some commentators think the chancellor’s projections on deficit reduction are not realistic. They are based on forecasts of modest economic growth of 1.5% next year but of 3.5% in both 2011 and 2012. In the words of one economist, these forecasts are “highly ambitious”. And the markets will remember that as recently as a year ago, Mr Darling was predicting only a 1% fall in output for this year, and eighteen months ago he was actually forecasting growth of 2.5%. The outcome will be a shrinkage of almost 5%. So the markets could soon take fright at the prospects.

That puts the Tories in the spotlight just as much as Labour. For although Mr Osborne says tougher measures need taking sooner he has been reluctant to announce yet what public spending he would cut and by how much. He is committed to protecting spending on health and overseas development but he too seems to want to wait until after the election before making clear precisely where the axe will fall.

Labour says, though, that the Tories readiness to cut spending more quickly threatens economic growth. The chancellor said: “the choice facing the country is between securing recovery and wrecking it”.

Meanwhile the Liberal Democrats’ verdict on Mr Darling’s statement was that politics was winning over economics. Their spokesman, Vince Cable, said: “What we needed was a national economic plan and what we got is an election manifesto.”

What’s your view? Do you think the chancellor’s package was directed more at Britain’s economic needs or at Labour’s electoral difficulties, or do you think he got the balance right? Do you think the tax on bankers’ bonuses is a good idea or not? Do you think he is right or not to postpone the belt-tightening measures until 2011? Do you think his specific measures – curbing public sector pay and raising national insurance contributions – are right or not? Do you think his plans for reducing the government’s borrowing needs are credible or not? How worried are you that Britain may lose its top credit rating? Are the Tories right or not to want to cut the deficit more quickly? Do you think George Osborne needs to be clearer where the Tories would cut government spending or not? Where would you cut spending? And has the chancellor’s package affected the way you intend to vote when the election comes?

Let us know your views.

Ethical Investment: On the Road to the Copenhagen Summit

YouGov research on behalf of National Ethical Investment Week,which runs from 8 – 14 November, has shown that nearly half (49%) of people with savings and investments would like to use their money to make a difference.

However, at present, only 8 per cent of investors hold a green and ethical investment or savings product. This low figure seems to reflect investors’ uncertainty about the degree of expert advice in the area. More than a quarter of the respondents said they would like the government to introduce rules to ensure financial advisers asked investors if they were interested in green and ethical investments. 44 per cent felt the financial services industry needed to provide clearer evidence of the green and ethical impacts of investments in order to attract more money.