• I expect the Pre-Budget Report (PBR) to be a double-edged affair, with measures to provide short-term support for the economy accompanied by plans to bring public borrowing down more quickly further ahead. But a much bigger fiscal squeeze is still likely after next year's election.
  • Alistair Darling will present his third, and quite possibly last, PBR against a background of conflicting fiscal, economic and political pressures. The dreadful state of the public finances argues for draconian action to get the books back in order. The recently unveiled Fiscal Responsibility Bill, enshrining in law current plans to halve the budget deficit over the next five years, does not go nearly far enough.
  • But the economy remains in need of an additional boost if it is to catch up with its competitors in the global recovery. After all, despite the UK's relative weakness, it is the only major economy whose fiscal stimulus package disappears next year on current plans. At the same time, of course, the Chancellor and his predecessor will clearly have one eye on next year's general election.
  • All this makes the contents and stance of the PBR highly uncertain. But I suspect that Mr Darling will attempt to balance the various considerations by unveiling a package designed to "go for growth" over the next year or so, accompanied by medium-term measures to put the public finances back into a more sustainable position. A fiscal giveaway of around £10bn next year may turn into a tightening of some £30bn p.a. by 2012-13.
  • Near term support for the economy may come from the further bringing forward of capital spending from future years, as well as temporary tax cuts aimed at the housing and labour markets. Measures to improve the fiscal position further ahead may incorporate further rises in VAT and capital gains tax, and much deeper cuts in public spending.
  • But political constraints will limit just how far Mr Darling will dare go to sort out the fiscal mess at this stage. Whoever is in power after next year's general election will still need to implement a much bigger fiscal squeeze which will act as a major constraint on the growth of the economy for a number of years.


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