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Editorial: The budget: The big squeeze

Guardian Economics 7th April 2009

Whoever is chancellor after the next election - be they Alistair Darling or George Osborne or even Cheryl Cole - will be the most unpopular person in the government, and possibly the country. That is one implication of yesterday's calculations by the Institute for Fiscal Studies, which projects a hole in public finances that will gape well into the next decade. Over and above the tens of billions of pounds in tightening measures already announced in last November's pre-budget report, the government will need to find another £39bn a year by 2016 if it wants to return to the golden rule minted by Gordon Brown of borrowing only to invest. That figure is equal to each family in the UK paying an extra £1,250 of taxes every year, or to an all-out freeze in public spending for five years. Any future chancellor is more likely to combine tax rises with spending cuts - but either way, he or she will have to make heavy use of the word no.

What has caused the hole? Despite the kneejerk Tory response yesterday, it is not the extra stimulus spending announced by the chancellor in November. That was a one-off splurge of between 1% and 2% of national income - small change compared to the huge borrowing the IFS (or the IMF or the other well-respected researchers who have run their rulers over the UK's fiscal position) is talking about. No, the big budgetary blowout is largely down to two other factors. First, the recession has been more severe than the Treasury anticipated, which means that tax revenues have been even harder hit. Last year ministers (some of whom should have known better) assured voters that Britain was well placed to weather the recession; it is now clear that the opposite is the case - that an economy dependent on its finance sector and a socking great housing bubble is particularly vulnerable to a credit drought. Second, the government went into this recession with uncomfortably high borrowing. If the Tories were wrong to scaremonger about the UK's debt position last year, Gordon Brown was also at fault not to have brought tax receipts more in line with spending when he was chancellor.

If this mess was partly Mr Brown's creation, it is now Mr Darling's headache. In just over a fortnight the chancellor will have to present his second full budget, and amid a severe recession he will have much less room to manoeuvre than he would like. Mervyn King may have spoken up against a large slug of extra spending, but the figures would probably have settled that argument anyway. Any extra spending programmes should be targeted. Forget about spraying money on VAT cuts; the chancellor should concentrate on jobs, particularly on keeping youth unemployment down as far as he possibly can. There are two other things Mr Darling can do. First, shift the tax burden a little from low- and middle-income earners to the well-off. The chancellor has already outlined a supertax on ultra-high earners: now is the time to turn it into a real revenue generator, and cut taxes elsewhere. Second, Mr Darling needs to talk about what the public finances and the economy look like after the recession. How does the UK find a replacement for its formerly all-conquering financial services sector?

This is easier said than done. For the past decade British politics has been predicated on the assumption that GDP would keep rising for ever. New Labour was based upon leaving high earners alone while using the proceeds of growth on hospitals and schools. That era is over. David Cameron too left the Tories' deep-blue economics behind to concentrate on the more agreeable areas of social and environmental policy. George Osborne's lamentable performance on Radio 4 yesterday highlighted yet again that the Tories have no recession-ready policies. Threatening to slash council chiefs' pay is not the same as a programme to claw back £40bn a year. This recession has already created new dividing lines in politics - and it is not over yet.

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