Alistair Darling is a more courageous politician than his detractors acknowledge. His Budget speech began with one of the bravest statements about the economic outlook ever made by a Chancellor to the House of Commons: “Because of the changes made by this Government to entrench stability and increase the flexibility and resilience of our economy, I am able to report that the British economy will continue to grow through this year and beyond.” The Chancellor, you will note, was not predicting or forecasting or hoping or praying that Britain would emerge unscathed from the present period of global financial turmoil, falling property prices and credit contraction. He was presenting the British economy’s extraordinary stability and resilience as an established fact. “Resilience” in fact, appears to have become the Treasury’s favourite new buzzword, repeated six times in the first few minutes of the Budget speech and elaborated on in a special section entitled “The resilience of the UK economy” in the technical Red Book that accompanied the Budget.

If Mr Darling turns out to be right about Britain’s unique economic resilience, then the economic strategy behind yesterday’s uneventful Budget will pay off — and so, in all likelihood, will the political strategy that this Budget was designed to underpin. After a year of moderate growth, slightly declining living standards and steady-as-she-goes government, the Treasury’s books would still be in tolerable shape by next April — at least if the £100 billion of new Northern Rock debt continued to be kept off the Treasury books, in defiance of the newly independent Statistics Commission. This would allow the 2009 Budget to offer some modest giveaways to voters, helping to smooth the way for the general election that has to be held by the summer of 2010.

Given the present state of the world economy and the hand Mr Darling was dealt by his predecessor, this “fingers-crossed” strategy was about as good as could have been expected. There is, of course, nothing new about fingers-crossed Budgets, in which chancellors rely on rosy scenarios to make their figures add up. Gordon Brown was accused by the Tories and the City of gambling on overly optimistic assumptions after every one of his 11 Budgets, but he was generally right to do so. The country’s economic performance really did turn out to be far better than the sceptics expected. Widespread predictions of recession and fiscal crises were repeatedly confounded – in 1997, 2001 and 2005, as the section on “resilience” in the Red Book describes.

The only question really worth asking about yesterday’s Budget is whether this fingers-crossed strategy will continue to pay off. Is Britain’s ability to withstand global problems and bounce back from financial crises now an inherent quality of the economy, as implied by the Treasury’s Red Book analysis and Mr Darling’s unequivocal assertion that growth “will” continue? Or have the country and the Government simply enjoyed a run of luck that is now coming to an end?

Rose-tinted specs fail to offer hope

The obvious justification for Mr Darling’s relatively upbeat scenario is that the outlook is fraught with uncertainty

Background

• Darling's first Budget: the main points

• The Chancellor's speech in full

• Darlings first Budget: the reaction

• Chancellor hits the home budget as his debts soar

• Need to know: Budget 2008

The Chancellor delivers a modest Budget

As so often is the case, virtue, in terms of improving public finances, is not now, but at least a year away

Multimedia

• Video sketch: Matthew Parris and Ann Treneman

• Eco-worrier: should we be pleased?

• Green Central: round-up of the green Budget measures

Multimedia

• Graphic: how the Chancellor was boxed in

• Graphic: income and expenditure

• Red Box: a list of Darling's new enemies

• The winners and losers

While nobody can know for certain, four factors suggest that Mr Darling will not enjoy his predecessor’s good luck. The first is, of course, the state of the world economy and financial markets. While it is still far from clear whether the US and European economies will suffer a genuine recession or whether the crisis in the credit markets will dissipate quite soon, the risks to the world economy are mostly on the downside — and in this context the Treasury’s economic forecasts seem considerably more optimistic than they have in previous years. The “cautious” lower end of the forecast range, which is used for planning the public finances, has been trimmed only marginally, from 2 to 1.75 per cent in 2008. Yet the Treasury admits that independent forecasts today are clustered around an average of 1.7 per cent, with a range of -0.1 to 2.1 per cent. Even more boldly, the Treasury assumes an immediate rebound, after this very minor slowdown, to 2.5 per cent growth from 2009 onwards. Yet independent forecasts for 2009 now average only 1.9 per cent, with a range of -1.3 to 2.7. Other governments around the world have been much more aggressive in downgrading the growth expectations they use in their budgets for both 2008 and 2009. Mr Darling justified this optimism yesterday by pointing out that Britain grew faster than any other G7 economy in 2007 and would therefore continue to do so in 2008.

“While other countries have suffered recessions, the British economy has now been growing continuously for over a decade — the longest period of sustained growth in our history,” he added. This is perfectly true, but unfortunately a long period of uninterrupted growth can point to exactly the opposite conclusion, which brings us to the second reason for believing that the Budget strategy may fall apart.

Long periods of economic growth tend to create imbalances and excesses and these in turn trigger recessions. If Britain hasn’t suffered a recession for 17 years, this makes it more vulnerable than other countries, not less so. This is especially true because two of the main driving forces of Britain’s economy — finance and housing — are directly dependent on the economic imbalances that are now threatening to cause a recession in the US. British house prices and consumer debt levels are much higher relative to incomes — and have grown faster — than in other leading economies, including the US. Since these levels have now proved unsustainable in America, it seems very likely, therefore, that Britain in the year ahead will suffer a housing and credit correction at least as severe as the one now happening in the US. But if Britain suffers a slowdown as severe as the one hitting America — and rapidly spreading to Spain, Italy, France and Scandinavia — this will play havoc with the Budget’s tax and spending assumptions, pushing the public finances much further into the red. If the government deficits widen much more than the Budget documents suggest — and they certainly will if the economy slows more than officially predicted — then the third objection to Mr Darling’s fingers-crossed Budget strategy will come into play. This is the inability of the Government or the Bank of England to support the British economy with tax cuts and steep interest-rate reductions of the kind now seen in America. Britain already has the biggest budget deficit among the G7 countries and if a slowing economy causes the deficit to widen further, markets and the media will start to speculate about tax increases instead of reductions, which will hardly improve the confidence of consumers. Moreover, the Bank of England will be reluctant to reduce interest rates sharply if government finances are out of control, especially if this triggers a loss of foreign confidence in sterling and thus adds to inflationary pressures.

The danger of collapsing financial confidence in Britain points to the final reason for doubt about the economic strategy unveiled by Mr Darling yesterday: the self-inflicted damage in the Budget, which can only aggravate the dangers facing the British economy in the year ahead. The most obvious of these new risks is the huge change in tax regime for foreigners living in Britain. Mr Darling made a few small changes to his original proposals and offered a vague promise that there would be no further changes in the next few years. But these minor concessions are unlikely to prevent a significant outflow of highly paid foreign professionals and some of the businesses that employ them.

This capital flight is likely to put further downward pressure on the housing market, on retail and service businesses and also perhaps on sterling. The same can be said of the capital gains tax reforms and other tax tinkerings that have damaged confidence in the predictability of British economic policy. If falling house prices and a consumer slowdown now make the economy more dependent on business investment and exports, the Government will pay dearly for damaging international and business confidence in Britain.

But then again, the scepticism about Britain’s economic performance may once again prove unfounded and the Treasury’s belief in “resilience” may turn out to be right.

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