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Pre-Budget report analysis
“Extraordinary times”
In the most significant PBR yet, Alistair Darling detailed the Government’s economic strategy for mitigating the worst effects of the recession, and threw down the gauntlet to the Conservatives, with a series of measures that could see a 2009 election. 
With a “fair and responsible” package for what he called “extraordinary times”, the Chancellor nailed his colours to the borrowing mast in no uncertain terms, delivered on trailed measures on VAT, help for small businesses, and tax increases for the richest. He also found ways to increase liquidity in the economy, put more money in the pockets of pensioners and families with children, and address rising fuel bills.
The battle-lines for the next General Election are drawn. The Chancellor was at pains to outline the Government’s choice– borrow now to inject economic momentum; tax the highest earners, breaking with the New Labour orthodoxy in place since 1997; and raise NI to help fill the huge borrowing gap - the Chancellor admitted that borrowing will reach a peak of £118 billion by 2010. The Conservatives, having broken free of their self-imposed shackles in matching Labour’s plans, responded with the charge that Brown had presided over one of the biggest deceits of the public (an end to boom and bust), and argued that a huge tax bombshell awaits.
Fiscal stimulus - measures to tackle the recession
The thinking behind a fiscal stimulus is ostensibly straightforward – get more cash into people’s pockets to encourage spending. Darling hopes that a cut in VAT to 15% in the run up to Christmas will do just this, complementing the Bank of England’s interest rate cuts.
For the first time since Labour came to power, they’ve risked income tax rises, introducing a new top band in 2011, where those earning over £150,000 per annum would pay a 45% rate. In addition, the Chancellor will increase national insurance by 0.5% from April 2011, although Labour would raise the starting point for NI contributions to 20k per annum. In another acknowledgment that the tax system must help the least well off, the compensation package given to those hit by the abolition of the 10p tax band has been made permanent.
Other key measures
Business
The CBI and the Federation of Small Businesses (FSB) got some of what they were demanding from the Government. Darling announced a £7 billion package of targeted business help, including exemptions from foreign dividends for large and medium size firms, spreading all tax repayment periods, a deferment of the 1p rise in corporation tax, as well as exemption from business rates for empty commercial properties below £15,000 rate-able value. The temporary Small Business Finance Scheme, which will make £1billion available in loans for small firms was welcomed by the FSB, which had campaigned for a £1 billion emergency fund.
Infrastructure investment
Attracting considerable attention, and inspiring a sense of Keynesian déjà-vu for the more historically minded of commentators, are promises for increased infrastructure spending. The announcement of £775 million of new money for social housing received a warm reception from Labour benches. Schools and the motorway network were also identified as key recipients of funding. By ensuring the continued progress of large-scale projects, and keeping people in jobs, the Government hopes it will take credit for both a softened recession and improved key infrastructure.
Financial services
The Chancellor confirmed the plan for the
Families, children and pensioners
Ever the families' Darling, the Chancellor did not disappoint. In particular, the decision to bring forward to April an increase in child tax credit, which puts up the allowance to £2,235 for modest income families, is intended to target tax breaks where they are needed. The announced child benefit rise to £20 will now happen in January 09, rather than in April 09. Similarly pensioners will benefit from an increase in pension credit, with basic state pension uprated at the level of the highest point of inflation this year. Again the Chancellor attempted to dazzle with a one-off winter fuel payment for pensioners in January, together with a payment of £70 to parents of disabled children.
Homeowners
The Chancellor outlined steps to improve the supply of mortgages, avoid repossessions and increase the number of new homes. This will include a new Lending Panel to improve monitoring of lending to households and businesses. Darling added that repossession should be the "last resort" for mortgage lenders and there should be three months' grace for those struggling with payments. He committed the Government to working up a detailed scheme based on Sir James Crosby's report on finance in the mortgage markets, adding that he will report back by the Budget.
Welfare to work
The three strands of support announced to mitigate rising unemployment (expansion of JobCentre Plus services, expansion of Rapid Response Service for redundancy and extension of Train to Gain) represent an investment of some £1.3 billion over the next two years to help the economy respond effectively to economic challenges. The Prime Minister will also be Chairing a new National Employment Partnership which so far includes 20 of the
Environment
The Chancellor announced that the air passenger duty would be reformed into a four band system with those travelling furthest paying the largest charge. He also made an additional £100 million available for the Warm Front scheme (supporting people through fuel poverty) as well as well as providing £50 million specifically to provide home insulation. He will extend the renewables obligation to 2037 and provide an additional £335 million for energy efficiency schemes, flood defences and more environmentally friendly trains. He also pointed out that Ofgem will monitor price changes and publish quarterly reports detailing the link between wholesale and retail energy prices and said if sufficient progress is not made in the next few months in closing “unfair gaps in pricing between payment methods” the Government will use statutory powers to end unjustifiable pricing differentials.
The politics of the economy
The political stakes now could hardly be higher, politically or economically, with both parties taking risks with their strategies. The Opposition’s insistence on only fully funded tax cuts bucks a broad consensus about the need to kick start lending and oil the economic wheels. On the other hand, the Government must face down commentators reeling from the borrowing figures and see how the public takes the admission by the Chancellor that the economic books won’t be balanced until 2015.
The PBR will only heighten speculation about a 2009 election. The reality now is that the Government must now make good the Chancellor’s pledge that this package will see the
November 2008