Darling’s fiscal fiction

Posted by Neil Hume on Dec 10 09:45.

BNP Paribas’ Alan Clarke is not the only City economist seriously displeased with Wednesday’s pre-Budget report.
Citigroup’s Michael Saunders also has a few choice words for the chancellor, who he accuses of trying to create a fiscal fiction that the UK’s huge deficit can be resolved by taxing the ‘few and not the many’.
(Emphasis ours) The PBR appears to be aimed at reviving Labour’s core support rather than seriously tackling the UK’s medium-term fiscal problems. The PBR extends the “tax, borrow and spend” fiscal trend of recent years, with slight upward revisions to the deficit forecast for 09/10 and 10/11, further tax hikes on top income earners and slight rises in planned public spending in 10/11. Moreover, it does not produce credible and detailed plans to return the UK to a sustainable fiscal stance in coming years.
In our view the PBR seeks to create a fiscal fiction that the deficit can be resolved solely by tax hikes on a relatively small share of the population (’the few, not the many’) and without painful public spending cuts. The revenue forecasts again look over-optimistic, and there are no public spending plans after 2010/11 — only vague forecasts. The Chancellor pledged to protect spending on health, schools and the police, but gave no sign where the axe will fall. Given the record of recent years, this lack of clarity is likely to fuel scepticism whether the Chancellor really is committed to spending restraint.
Saunders fears the the fiction might work and deprive the Conservatives of an overall majority after the election.
And that poses very serious risks for the UK economy.Rather than produce a serious and credible fiscal consolidation plan, the Chancellor’s aim looks to be chiefly political: to reinforce Labour’s core vote and try to deprive the Conservatives of a majority in Parliament after the next election. The Conservatives need to be at least 10% ahead of Labour (roughly) to get a majority in Parliament (the required lead increases if the Lib Dems do well). Recent polls suggest that the Conservatives are indeed about 10% ahead of Labour, but polls also suggest that Labour’s core support is significantly higher than Labour’s current voting intentions (whereas the Conservatives’ voting intentions are well above their core support).
Thus, Labour’s political strategy look to be aimed at making the election tribal (hence the “class war” rhetoric); to avoid hurting their own core support (hence no early fiscal tightening); and to portray the Conservatives as a party that wants to cut public spending for ideological reasons (to detach floating voters from the Conservatives).
This approach seems to be working in political terms: three of the last five polls have pointed to a hung parliament. But, in market terms, it implies no preelection commitment to fiscal consolidation and a growing risk that there will be a hung parliament — which also could prevent early fiscal consolidation post-election as well.

Related links:
Darling starts to tighten the screw - FT
UK PBR - recipe for a downgrade? - FT Alphaville
Prevarication and Newspeak will not fix our finances - Willem Buiter / FT
A reality check for fiscal Pollyannas - John Kay / FT