Is the Treasury’s plan credible?
Having ignored its existing fiscal rules because Mr Darling says it would be “perverse” to hit them and with years of fudging and fiddling the rules having already undermined their credibility, the Treasury has an uphill battle to regain trust that it will bring public borrowing back down to a sustainable level.
Its strategy is to move away from rules as far as possible and restore credibility through thoroughly believable forecasts for the economy, taxation and public expenditure.
Credibility is enhanced by its assumption that much of the shock to the economy will be permanent. But it will be harmed because few tough decisions have been taken.
Spending restraint is by the stroke of a pen after 2011-12 rather than the difficult process of agreeing and announcing individual departmental budgets. There are relatively few tax increases save for the reversal of the temporary VAT reduction and the rise in tax revenues assumed is certainly aggressive.
There is no formal external monitoring of the government’s economic or revenue forecasts.
So far, investors have retained their appetite for government bonds as the fiscal rules have lost credibility. Mr Darling’s modest reforms to the fiscal framework suggests he thinks investor desire for government debt will continue without a much tighter medium-term framework. That is quite a gamble.
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