The Green Budget
The Institute for Fiscal Studies thinks the chancellor is right not to start moving to a Plan B. Though borrowing could come in slightly lower than expected this year, the Institute's "Green Budget" says that "having set out his fiscal consolidation plan, it is important that Chancellor George Osborne resist the temptation to engage in any significant net giveaway in the Budget".
"While last week's growth figures were disappointing... any fiscal loosening aimed at helping the economy could be ineffective if it prompts an offsetting monetary tightening, and risks undermining investor confidence..."The macroeconomic parts of the report were put together with senior economists from Barclays Wealth. They are quite gloomy about the economy's long-term potential growth rate, which they think could be lower than the Office for Budget Responsibility (OBR) has estimated (though the OBR is less optimistic on this front than the Treasury was under Alistair Darling).
On the broad economic outlook, the authors broadly endorse the government and the OBR's position - but with gloomy caveats. They think the downside risks are probably greater than the chancellor suggests. But, depressingly, the authors don't seem to think the government can do much to offset these risks - or mitigate the effects.
For example, they think there is a risk that consumption will disappoint this year - as households respond to declining real pay rates and, amongst other things, falling house prices. And they don't expect companies to rush to the rescue, with big increases in investment, even though - as I have mentioned many times here - many companies are sitting on plenty of cash. Most troubling, they worry that companies could start shedding labour in a serious way in 2011 and 2012, to raise productivity after several years when it has not risen at all.
All or any of these negative shocks could throw the government's borrowing numbers off track - with the Bank of England not necessarily able to respond. In other words - Plan A could be even worse than we think. But there may not be scope for a Plan B. They think there's a roughly 1 in 5 chance of a double dip recession in 2011.
However, the report gives the lie to the suggestion that the government's cuts are similar to the consolidation plans being undertaken by other countries. Out of 29 industrial countries, only Greece is planning a sharper decline in structural borrowing between 2010 and 2015. And only Ireland and Iceland are planning a larger reduction over this period in public spending as a share of GDP.
Update 1140: There is a tension in the IFS report on the vexed question of a Plan B. (Some would say there's the same tension inside the Treasury.)
As the quote I referred to earlier suggests, the IFS and their co-authors believe strongly that the chancellor should not change the fiscal strategy as a result of the recent disappointing growth numbers.
But, in the press conference launching the report, the IFS deputy director, Carl Emmerson, has now made clear that the IFS does think the chancellor needs a Plan B - and he needs to tell us all about it. He needs to explain clearly what he would do, if the economic outlook turned out to be worse than expected.
The folks at IFS and Barclays Wealth do not think that this would be damaging to market confidence - or the chancellor's standing in financial markets. Possibly it would help.
The chancellor seems to disagree - he thinks it's risky to even mention a possible back-up plan. But they can all agree, apparently, that Mr Osborne's credibility would be hit if he was seen to actually tone down his spending plans at only his second Budget.