Darling's Dilemma

The Chancellor is on the horns of a dilemma when he presents his pre-Budget Report this month. He has to try and quicken recovery from the recession as best he can . But he also has to show that he’s got public spending under control. The much vaunted policy of prudence talked so much about by Brown in the past has long been in tatters.

If he’s to stimulate growth he will try to spend his way out of trouble with a programme of big public spending commitments of one type or another. This will provide a necessary fiscal boost and will almost certainly entail cutting taxes – which is now being demanded by all three political parties – and represents a total about face for the Liberals.

But again the question of where he finds all this extra money is drawn into sharp focus. There must also be a day of reckoning when debts have to be repaid. And if he wants to prove that public finances are not out of control he will have to consider a squeeze on spending and raising taxes: a thorny dilemma to which there is no easy solution.

The slashing of interest rates by the Bank of England gave a potent clue about the likely depth of the recession. As the economy slides tax returns the Chancellor and Treasury could have expected diminish, while at the same time there is an increasing demand on the public purse due to such considerations as the rise in unemployment benefits.

One wonders how much more Darling can afford to give away. He’s already put off increases in car tax. And can one blame him given the opprobrium such a move would trigger among the electorate and the parlous, indeed perilous state of the worlds car industry, impaled on the twin spears of both Government measures and Green lobbying.

In the mayhem it’s easy to lose sight of the electorate. How many votes would Labour lose if it appeared to clobber rather than help the electorate during its hour of need?

Brown’s standing has been enhanced by his major recession-surgery . He now has a greater standing on the world’ stage. He can, to a degree, claim plaudits for prompting European and other leaders into taking remedial action involving state bail-outs.

And yet, though his lead has been cut, Cameron remains a dozen points clear in the polls. There are many quick to remind the government that Brown should not be absolved for his part in the Great Crisis.

Brown’s party was in power; he was the Chancellor who presided over what is now seen as the birth of a vehicle with a dangerously powerful engine, which was propelled by greed, driven by mad bankers, and which had no brakes and bald tyres. It was a major car crash waiting to happen and it was inevitable that Brown’s Prudence would fall victim to what, with the benefit of hindsight, is a spectacular case of financial hit and run.

Given that politicians always have at least one eye on the ballot box - in the short term it is reasonable to expect that there will be a big giveaway in the coming months. Cuts in tax, perhaps a reduction in VAT, suspension of stamp duty and so on.

There are also likely to be more cuts in bank rate. Many economists are predicting that the rate could fall rapidly to two or one per cent. Others speculate that zero rates might come in. Such low levels will take Britain into unknown and even trickier waters.

There is still no guarantee that the banks will pass on any further rate cuts to hard-pressed businesses – especially the smaller ones, let alone the new start-up enterprises which have always been of such immeasurable promise and value to the economy – or to mortgagees.

Indeed, most of the banks have already given a big fat No to the suggestion that if the BoE rate dips further that they will pass on anymore cuts to the real economy.

Before Darling and Brown waved the big stick the bankers were brazen and hard-nosed about passing on the 1.5% cut. They will have another battle to persuade them once more to think about the national interest rather than just themselves and their shareholders.

In the longer term – whether it’s Brown or Cameron who gets in – the big giveaways will at some point have to cease. Expect public spending to be cut and taxes to rise. It is not a happy prospect for anybody. And one does not envy Darling’s dilemma.