Extraordinary times call for extraordinary action. Those were the words from the Prime Minister this morning when he was describing the pre-Budget report, one of the most significant economic and political announcements for a generation.
 

But will today’s £20bn fiscal stimulus (1% of GDP) make a real difference or is it merely a shot in the dark?

Are you going to spend more on the high street now VAT has gone down to 15% – the lowest level allowed under EU law? We've already seen massive reductions on the high street and thus far it's failed to entice shoppers to start spending again. Governments in Germany and France have already ruled out a similar reduction in VAT.

And while a round of drinks should have got cheaper down the local boozer and petrol at the pumps cheaper still Darling increased duties to offset any VAT reduction.

While we still trawl through the detailed proposals it’s clear these temporary tax cuts will bring more pain in the future.

Taxes coming down and spending going up means more borrowing, which means adding to the deficit.

The books need to be balanced. The increase in Income Tax is hardly going to line the Treasury coffers – raising an estimated £2bn from 2011 onwards – but does represent a significant shift to the left in political terms and perhaps the end of the New Labour concept.

The money being ploughed into the economy will have to be paid back at some point and that will mean higher taxes for everyone.

With that in mind you can easily argue that we’re mortgaging not just our own future but our children’s too and certainly backs up claims that this is looking more and more like a ticking tax time bomb.

The Prime Minister insists this is not a gamble but how else can you view it?

If you borrow money to put into the economy it will have to be paid back.

It’s a gamble on whether investors will buy government bonds. Insurance premiums have risen to such an extent that the cost of insuring UK government debt is second only to insuring that of the Italian economy.

That in itself is a stark warning on how fragile the UK economy really is.

With so much leaked over the weekend press there was little movement in the markets this morning, with traders still looking for the certainty of a political statement made in the Commons.

Darling opened his pre-Budget speech talking about “economic uncertainty not seen for generations and extraordinary and challenging times for the economy”.

He pinned the blame on this unprecedented global crisis on failings in the global banking system.

True enough financial markets affect everyone’s daily life and if they fail to operate properly they affect everyone of us.

So we broadly welcome Darling’s support for lending to families and business and moves to make capital raising easier for banks with the concession that the process of raising money through rights issues is too slow and complex.

It’s also heartening to know that major lenders have agreed to wait three months before they initiate court proceedings when it comes to repossession although it’s notable that Nationwide already did this.

And with the publication of the Crosby report into mortgage funding today we also welcome moves intended to free up the credit markets.

Yet the 0.5% increase in all National Insurance contributions will hit everyone’s pocket.

The Conservative response to Alistair Darling’s pre-Budget report has been at best lacklustre and it’s perhaps even more of a gamble to sit back and do nothing.

While the government has been seen to be doing all it can to minimise the length of the recession we are now in there are certainly troubled times ahead.

This has been a pre-Budget more about big politics than big economics. A pre-Budget where City reaction has been vital. And of course a pre-Budget about confidence.

Whether it works remains to be seen.

SA72 6BT