Timely, temporary and targeted

This was Gordon Brown's rhetoric tonight on tomorrow's 'pre-budget' report, although in practice it is more like an actual budget than the usual dress rehearsal. It appears that a central plank is to be a 2.5 per cent cut in VAT which could last for fifteen months. Whether that will be enough to boost the economy remains to be seen.

The retail economy is actually not doing that badly, although some retailers find the official figures misleading. One of the paradoxes of the present situation is that the real problem in the UK, as the IMF recently pointed out, is personal indebtedness. But given the importance of household consumption in driving the economy, shoppers have to be encouraged to splurge some more.

The IMF, business organisations and the majority of analysts agree that a substantial fiscal stimulus of more than 1 per cent of GDP is essential. Somewhat cheekily, Samuel Brittan suggested in the Financial Times on Friday that the Government could print more money without risking a monetary driven inflation.

I am afraid that Dave Cameron and George Osborne are out on a bit of a limb. Of course, I understand why they are upset. It's like someone else ordering a slap up dinner of the sort the Bullingdon Club might have enjoyed and then presenting you with the bill eighteen months later.

Taxes will have to be raised and public expenditure cut. The risk is that this would not be a temporary phenomenon, but could go on for some time, acting as a drag on the economy. But the greater risk is not doing enough now. This is a very deep crisis, as the problems faced by Citibank show.

The consequences can be seen in the normally 'cool' country of Iceland where police had to use pepper spray and batons to disperse an angry mob trying to invade a police station. Angry Icelanders want their prime minister and central bank governor to resign and for an election to be called. But how many of them were complaining when their country was floating upwards on a great iceberg of debt?

As always, I would recommend the Institute of Fiscal Studies for informed, authoritative and balanced coverage tomorrow. Visit their special pre-budget page here: IFS