Budget 2013: The domino theory of deficit reduction

  • 14 March 2013
  • From the section Business
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George Osborne
Image caption The chancellor is not expected to announce any change of direction in next week's Budget

Talk about lowering expectations. The Treasury really wants you to expect a boring Budget next week, and in one crucial respect, I think it probably will be: the chancellor is not going to stand up and announce that he's decided Ed Balls was right all along.

Borrowing over the next few years is likely to be higher. And the growth forecasts a bit lower. But there will be no big change of direction. Though, behind the scenes at least, I have been struck by a significant change of tone.

When officials and ministers used to make the case against Plan B, they used to talk about the financial markets. Now they talk mostly about the politics of a reversal - and what a change of plan would do to the internal dynamics of the coalition.

Call it the domino theory of deficit reduction: if you let one piece of the programme slip, George Osborne is convinced that the rest of it will start to tumble as well. The moment you reverse one tough decision, every minister will start to think the tough choices in his or her department can be revisited as well. And the public will decide this supposedly tough-minded government has got no spine.

The Treasury has had this mindset since the start of the parliament. It might not have covered itself in glory during the Gordon Brown years, but now the informal motto of its senior officials is "to hold the line against fiscal flakes".

City doubters

What's interesting is that political folk from Number 10 and Number 11 are increasingly talking the same way, rather than focusing on the City, parts of which are starting to sound a bit "flaky" as well.

You are now hearing respected city economists such as Michael Saunders, who supported Mr Osborne in 2010, suggest that a modest increase in capital spending might be a net positive for the economy, even if it did raise borrowing. We have heard similar arguments from inside the IMF.

There are still plenty of city economists who would disagree. They say it would take quite a big increase in capital spending to make a difference to the economy.

You have to think this would have a massive effect on growth to think it would not have a big effect on borrowing and future debt.

That is probably why business groups such as the CBI and the British Chambers of Commerce are still cautious on the subject. But senior folk I have spoken to from at least two of the major ratings agencies do not seem to think a modest increase in borrowing, linked to higher investment, would be a major problem.

Political confidence

So, you might say that the largest obstacle in the way of Mr Osborne announcing an even slower deficit reduction plan next week isn't the financial market, but the chancellor's lack of confidence in his own side.

In effect, he doesn't think MPs will be able to tell the difference between a targeted stimulus and a free-for-all. And who knows, he might be right.

That doesn't really mean he's forgotten about the financial markets.

He's just mindful that, in the current climate, the ratings agencies themselves are starting to focus as much on the politics of the government's strategy as the economics.

Moody's, for example, said doubts about the political sustainability of future cuts were a big factor that might lead them to downgrade the UK's credit rating even further.

Labour, and many Liberal Democrats, think the argument goes the other way. They think it's the lack of growth (and lack of flexibility in the timetable for borrowing) that will make the programme politically unsustainable, not any lack of fortitude on the part of the chancellor.

But Mr Osborne is credited with being a very impressive political strategist. And that is how he sees it. Which is why next week's Budget will indeed be a bit dull.

It will be full of announcements about the supply side of the economy. And peppered with talk of accelerating private infrastructure projects and making it easier for first-time buyers to get a mortgage.

Mr Osborne will also have to announce that he will be borrowing a bit more, between now and the election, than the OBR suggested in December, and at least £65bn more than he expected in June 2010.

But that is as far from Plan A as he seems willing to go.