A monetary non-event

Two days on and the UK’s pre-Budget report is still generating huge amount of political heat with little light and none of the arguments has anything to do with the windfall tax on bonuses.

Depending on who you read, the PBR was either an eye-wateringly tight budget with swingeing tax rises and spending cuts, a fiscal loosening or a neutral statement. All three can be true depending on what form of legitimate comparison you choose to make. I’ll tell you what I think in a second, but the upshot is whatever assumptions you make, the numbers are small and so have minimal effect on the economy, the likely recovery or the exit from extraordinarily loose monetary, fiscal and financial policies.

I don’t think the debate has been helped this year by the normally-reliable Institute for Fiscal Studies (disclosure: I used to work there and have great fondness for the organisation), which chose to base its analysis on the government’s arbitrary numbers for the structural deficit. On this basis the PBR represented a fiscal loosening, but had the treasury chosen to assume a 7 per cent permanent loss of output rather than 5 per cent, the same forecast would have represented a fiscal tightening.

I went though the numbers in detail in Thursday’s Financial Times. But I have now found an even easier way of describing what happened, sticking to cash figures. That is something we can measure while the underlying structure of the economy is something we cannot.

All you need to know is:

Projected borrowing, given the odd billion, is the same as in the BudgetTaxes were raised a little (about 0.4 per cent of national income)Plans for cash spending and tax revenues are a touch lower than in the March Budget (give or take the odd billion)

Given these three facts and the Treasury’s insistence on keeping borrowing on the same path as in the Budget, two conclusions are possible, either or both of which can be true.

Alistair Darling had to raise taxes to keep borrowing improving as rapidly as in his Budget forecasts and/or he had to raise taxes because the government could not live with the implied spending cuts that would have been necessary to keep borrowing on its previous path.

In addition, none of these budgetary changes was large. It all means that those such as Mervyn King, who were disappointed with the fiscal plans before Wednesday, have every reason to remain so now.

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