Two summers ago, Alistair Darling arrived at the Treasury with a reputation for possessing the government's safest pair of hands.
This Wednesday, when the chancellor unveils his second Budget, his hands may not shake – Darling has retained his default appearance of almost distracted indifference – but his knuckles will be white as he grips that battered red box.
This time last year, the chancellor looked entirely credible as he spoke with unflinching optimism in the wake of increasingly uncomfortable economic predictions. On Wednesday, however, that approach may not wash.
Employment is hovering around the two million mark and is rising, while the Institute for Fiscal Studies last week contradicted official estimates by predicting that the government would need to find £40bn a year to keep its borrowing in check.
Speaking to The House Magazine, Liberal Democrat economics spokesman Vince Cable – one of the few to emerge through the mess with his reputation enhanced – underlines the gravity of Wednesday's statement. "It is set against the most difficult economic environment that we’ve experienced in our lifetime, with looming unemployment, a continuing crisis within the banking system, and rising budget deficits," he warns.
Last week Frank Field, the former welfare reform minister, went further still, declaring the economic situation to be “more precarious than in 1940 when we stood alone against the Nazi tyranny”. The fear in Field’s words is shared by many of his colleagues. The country wants answers, Labour MPs need good news, and the prime minister is desperate for time to overhaul an as-yet-insurmountable Conservative poll lead.
The challenge will test Darling's steady hands to their limit.
When he succeeded Gordon Brown at 11 Downing Street, Darling inherited an economy basking, as Brown said, in the longest period of sustained economic growth that Britain had ever experienced. After previously soothing jittering nerves at the Department for Social Security and the Department for Transport, Darling could have been forgiven for thinking he had earned some calm after the storms.
Then the clouds broke in spectacular fashion. Last August, an interview with Darling appeared in the Guardian under the headline: 'Storm Warning'. The chancellor declared the country’s economic condition to be the worst in over 60 years.
After a difficult 12 months – which saw the embarrassing loss of two disks containing personal data relating to child benefit claimants, a threatened backbench rebellion over the 10 pence tax rate, and the first run on a British bank in a generation – the interview coincided with the beginning of the economic meltdown.
The prime minister's attempts to deflect attention from domestic discomfort by remoulding himself in the image of the world’s chancellor have twice been derailed. His pre-G20 global world tour was knocked from the front pages by the patience-testing interpretation of the second homes’ allowance by certain ministers, while his post-G20 glory was prematurely curtailed by the playground antics of former Downing Street aide Damian McBride and his bungling sidekick, Derek Draper. The global trump cards are all played out, and Darling needs a Budget joker.
Over the last six months, the government has undertaken a programme of massive economic intervention, in the shape of the fiscal stimulus unveiled in November's pre-Budget report, the rapid reduction in interest rates and introduction of quantitative easing, and the recapitalisation of the banks through both bailouts and the Asset Protection Scheme. But the economy continues to falter.
The effects of tax changes – most prominently the temporary reduction in standard VAT from 17.5 to 15 per cent – announced in the PBR have, many city analysts argue, been overshadowed by further emergency bank bailouts and the impact of the global downturn.
The chancellor now has little room to manoeuvre, and seems to be in agreement with the assessment of Mervyn King, the governor of the Bank of England, that the financing for a further fiscal stimulus – following a decade of massive government investment – cannot be found.
With the cupboard so bare, Darling would appear to have just two options left: tax rises and cuts to public expenditure. On first glance, neither would appear popular, especially in a year before a general election.
For those within his party, it is the latter option that is of greater concern, and Darling’s greatest balancing challenge. For while public spending cuts may be the best way to plug the Treasury’s cavernous spending gap, politically it is dynamite. Those Labour MPs – such as Jim Murphy in Glasgow, Dave Anderson in Blaydon, or Ian Pearson in Dudley – whose constituents depend disproportionately on public sector jobs, will be watching with concern. Darling’s challenge is to make it clear, for the benefit of the UK’s financial markets, that he is serious about public spending restraint, but phrase his words carefully enough to ensure that any pain on the ground won’t be felt until after the next general election.
Such an announcement offers little to the Conservatives, with many in the party supporting plans for such cuts.
Then there are the arguments for increasing taxes. The left-leaning Compass group, headed by former deputy leadership candidate Jon Cruddas, last week published a YouGov-commissioned poll showing support for tax rises aimed at high earners. "What this poll demonstrates is a seismic shift in public opinion which the government desperately needs to respond to," Compass secretary general Gavin Hayes tells The House Magazine. "Greater tax justice is now both radical and popular: whether it’s closing in on personal tax avoidance, introducing a new wealth tax on those earning over £250,000, immediately introducing a new top rate of tax on all those earning over £100,000 or a new tax on bonuses. They are just the sort of measures the government needs if it is to win back voters."
Hayes is hopeful that the government shares his thinking, but is concerned that it "won’t go far enough and will therefore miss a massive opportunity to make the tax system far more progressive – to the benefit of the vast majority of taxpayers".
The Lib Dems will announce their alternative Budget proposals today. It crosses into similar territory.
"We would look for a redistributive tax package in which taxes are cut for people on low incomes. The tax cut would be financed by removing some of the tax reliefs which are currently available to very high earners, including tax relief on pensions contributions at a higher rate and the indulgence of the many tax loopholes which British companies and others are exploiting through tax havens," Vince Cable tells The House Magazine.
"We think that the redistributive tax measures, though they are tax-neutral, would provide a boost, as people on very low incomes are more inclined to spend their incomes than the wealthy."
Cable, who believes that the "questionable stimulus" from the VAT cut "should be used for targeted public investment", backs public spending cuts in certain areas such as global defence commitments, and the government target of ensuring that 50 per cent of young people attend university. Both suggestions were also made by Frank Field as part of his proposals to remedy the budget deficit.
Darling surely won’t dare to go as far as either Cruddas or Cable, and any signals on public spending cuts will be dressed up with the utmost care. He won’t be able to avoid the gloomy proclamation over when the economy is likely to return to growth, but Treasury officials will pore over the statement to ensure that the figures unfurl in the least dramatic way.
In his apology over the McBride-Draper shenanigans, the prime minister hinted that this week's Budget would be aimed at businesses and jobs, and Labour MPs will be encouraged by commitments on training and help for struggling firms.
But to win a general election, more is required. In 1997, New Labour promised that it would serve the many, not the few. A Budget that raises taxes on the well-paid would force the Conservatives to choose between agreeing with the government’s tax measures, to the fury of the party's Right, or attack them.
The latter could see the Conservatives portrayed as defending the interests of the wealthy few, who barely notice the downturn, at the expense of those at the sharp end of the recession. Fast-tracking, or extending, the post-election tax rises on large incomes, announced last year, may not raise huge amounts for the Treasury – certainly not enough to plug the gap in public finances – and could be portrayed as mere political posturing, but it is a viable way to rouse the core Labour support and cheer the backbenchers.
Steady hands don’t tend to take risks, but Darling, together with Brown, must gamble if they are to provide a political shot in the arm for Labour on Wednesday.
