Roger Bootle, economic adviser to Deloitte, looks ahead to the 2008 Budget on 12 March

• Alistair Darling presents his first Budget at a time when the apparent needs of the economy and the public finances could hardly be further apart. His room for manoeuvre is pretty tight, but he should be able to afford a small tax giveaway to help to support the economy.
• Mr Darling will be forced to acknowledge that the outlook for the economy has weakened since October’s Pre-Budget Report. Although he predicted that GDP growth would slow sharply this year, the risks have shifted firmly to the downside. Meanwhile, the strong recovery he anticipated next year now looks much less likely.
• At the same time, though, the state of the public finances points to the need for a fiscal consolidation. Although Mr Darling’s Pre-Budget Report forecast of public borrowing of around £38 billion this year now looks broadly on track, this is a poor starting position when the economy looks set to slow sharply.
• Meanwhile, the nationalisation of Northern Rock has added to the strains on the public finances by adding around £100 billion to public sector debt. Mr Darling will adapt his fiscal rules accordingly. But in the event of a major housing market downturn, it could leave the taxpayer exposed to significant losses.
• In short, the Chancellor is caught between a Rock and a hard place. The result is that this Budget is unlikely to set the world on fire and certainly won’t emulate the US government’s forthright action to support its beleaguered economy with a major fiscal stimulus.
• Nonetheless, January’s timely surge in corporation tax receipts has probably made room for a small package of net tax cuts. A further cut in income tax is a possibility, as is a reduction in stamp duty to help the ailing housing market. He could also suspend the planned rise in fuel duties, although this would not help the Government’s environmental credentials.
• A small giveaway should not provoke an unfavourable response from the MPC. And while it will have a detrimental effect on the public finances in the near-term, if it helps stop the economy from descending into recession, it might ultimately prevent a much bigger fiscal disaster further ahead.

Ends

Notes for editors
This press release has been prepared by Roger Bootle, Economic Adviser to Deloitte. If you have any questions regarding the views in it, please contact Roger Bootle directly on 07887 955 875 or 020 7823 5000 or via email on business@capitaleconomics.com.

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