ANALYSIS: Pre-Budget Report - the good, the bad and the ugly

By Dr Gerard Lyons for MailOnline
Updated: 18:49 EST, 24 November 2008

Standard Chartered's chief economist Dr Gerard Lyons analyses Alistair Darling's Pre-Budget Report choices and finds them wanting...

Yesterday the Chancellor gave us the good, the bad and the ugly. The good was the decision to effectively throw the kitchen sink at the economy, with a host of measures.

Overall, with people and firms cutting back their spending it makes sense for the government to step in. And to do this it has to borrow more.

Not an ideal situation, but the prospect of a deep recession merited this action. Such a fiscal package should be timely, targeted and temporary. It was certainly timely and targeted.

The Chancellor will also claim it is temporary as the measures will add £9.3billion this fiscal year and £16.3billion in 2009-10 before he claws some back in following years, although it is not until 2015 that the budget numbers return to balance.

Yet it is important not to get carried away about its likely impact.

This summer the US unveiled a fiscal stimulus aimed at stopping their recession. It didn't. Neither will ours, although it will limit the downside.

I would have opted for bigger income tax cuts, rather than a VAT reduction. If the huge sales discounts currently in the shops can't encourage people to spend then a reduction in VAT itself is unlikely to.

Tax cuts would have allowed people to have more disposable income and most people would have spent it or paid off existing debts quicker.

That leads onto the bad. The public finances are in terrible shape. Ideally the government should have set an example to the country by saving more during the good times.

But it didn't. Even though public debt levels are low, we have seen big budget deficits in recent years.

Indeed, the country borrowed to the hilt, with the government and the general public leading the way.

Unhelpful: Economist Dr Gerard Lyons says the government should have made bigger income tax cuts instead of a near pointless reduction in VAT

If we had saved more in the good times not only would the country not be in the mess it is in now, but the Chancellor would have unveiled his measures from a position of sound fiscal strength.

Instead, government borrowing is set to reach £118billion by next year but it could easily be worse, as the economy is unlikely to rebound as quickly as the Chancellor expects.

That leads onto the ugly. This recession was not caused by the latest financial crisis as the Chancellor suggested, although clearly it will make it worse.

The balance of the economy has been wrong for some time. I was not convinced by what I heard yesterday that we will get ourselves back into shape any time soon.

Even though we want more spending now, once we come out of this recession we need to see the country saving more. We also need to have a country that is able to compete globally.

Some parts of the economy are great. We have the sixth biggest manufacturing sector in the world.

Despite recent problems, large parts of the City are world class. But these sectors will need to operate in a competitive world.

Raising taxes, even on the rich, is not the answer. Public spending is too high, too wasteful and does not provide value for money.

We need a new fiscal framework to sort this out. There was nothing on that yesterday. The City and international investors are wary, with the pound set to weaken further.

Even after yesterday's fiscal package, the Bank of England still needs to get rates down to 1 per cent or less as the economy weakens further.

Two wrongs do not make a right.

It was wrong for the Government to borrow too much in good times and it would have been wrong not to have unveiled a stimulus yesterday.

But there is little confidence about the longer-term fiscal outlook.

The challenge is to make sure credible measures are implemented once the economy turns the corner.

But that is some way off.