1. This Pre-Budget Report takes place at a time of
great uncertainty, both economic and political. Over the past
18 months Governments around the world have provided huge support
to the financial system, to prevent its collapse. Many Governments
have also intervened to protect the wider economy from the results
of the financial crisis. At some point most of this support will
need to be unwound, the timing of which is a matter of debate,
and there will need to be a major consolidation in public finances,
which have been badly affected by this support. The European Central
Bank's December 2009 Financial Stability Review warned:
All in all, the challenges facing the euro area
banking sector in the period ahead call for caution in avoiding
timing errors in disengaging from public support. In particular,
exit decisions by governments will need to carefully balance the
risks of exiting too early against those of exiting too late.
Exiting before the underlying strength of key financial institutions
is sufficiently well established runs the risk of leaving some
of them vulnerable to adverse disturbances, possibly even triggering
renewed financial system stresses. Late exits, on the other hand,
can entail the risk of distorting competition, creating moral
hazard risks that come with downside protectionincluding
the possibility of excessive risk-takingas well as exacerbating
risks for public finances.
2. In the United Kingdom the Government has injected
immense resources into the banking system. In addition, it has
attempted to bolster the economy in a variety of other ways.
The VAT rate was temporarily cut from 17.5% to 15%. HMRC has
given otherwise viable businesses longer to pay their tax liabilities.
The Enterprise Finance Guarantee Scheme was introduced to support
bank lending to small and medium-sized enterprises. There has
been a range of policies designed to help particular sectors,
such as the car scrappage scheme. The Bank of England has also
intervened, reducing interest rates to 0.5 per cent. In consultation
with the Treasury it has also implemented a policy of quantitative
easing, introducing an extra £200 billion into the economy.
3. In addition to the economic uncertainty, the United
Kingdom faces political uncertainty in the run-up to the next
General Election. The two factors cannot be disentangled. Ms
Karen Ward, Chief UK Economist of HSBC told us that business uncertainty
about future government policy was delaying decisions which might
benefit the economy:
many of the businesses I have met over the past
six monthstheir main concern [
] is about the lack
of clear fiscal consolidation or how it is going to come through,
and that is holding them back from investing and holding them
back from taking on new staffconsiderably more than any
other aspects of their business. They are concerned about higher
taxes for them personally and then higher taxes for the people
that demand their goods as well.
Professor Sheila Dow, of the University of Stirling,
also considered that the Government's forecasts might affect consumers'
decisions, although she suggested it as a reason for Government
caution in the information it gave:
The trouble is there are two audiences: there
are the analysts and those in financial markets who take a particular
view of the Government's fiscal policy and, on the other hand,
there are households and firms who would perhaps be encouraged
to withdraw from spending if they thought that taxes were going
to rise significantly in the future.
Any forecast is subject to uncertainty, but we recognise
that the uncertainties surrounding the forecasts in the current
Pre-Budget Report are even greater than usual.
1 European Central Bank, Financial Stability Review,
December 2009, p 17 Back
Q 16 Back
Q 57 Back