Economic View: Your Chancellor needs you

Well, we at last have a date for the Budget: Wednesday 9 April. This is the late date allegedly chosen because by then the Chancellor hopes to know how much Iraq will cost – though personally I think it is more because Gordon Brown is a man who likes to dither.

The war is certainly one of the great uncertainties facing the Treasury, but it is only number three or four on the list. Far more important in framing the Budget are variables like the sustainability of consumption, the impact of that on growth and the consequences for government revenue. The Chancellor can, within broad limits, determine how much the Government should spend. He has much less control over how much, without further tax rises, the exchequer might bring in.

Revenues depend on the strength of the economy, which has been sustained by strong consumption. Our willingness to spend has really been astounding. Look at the left-hand graph above, which shows that consumption here in recent years has increased a little faster even than in the US and vastly faster than in France or Germany. As has been widely noted in the past year or so, equity take-out – people borrowing against the security of their homes – has been the main force sustaining this spending. And, of course, people cannot increase their borrowing for ever.

So the first question that Mr Brown must try and answer is how long the consumer boom can last. There is some evidence that it is already cooling, just as there is some evidence that the housing market is topping out. You can see the change on the high street in the next graph, which shows the balance of retailers reporting higher or lower sales. True, retail sales account for only about one-third of consumption; the rest is travel, entertainment and so on. There may be some shift away from people buying things towards people buying services. Nevertheless, it is slightly ominous to see the way that the graph has turned down.

The sensible assumption Mr Brown should make is that there will be a slow-down from more than 4 per cent growth to perhaps 2 per cent. But were the housing market to collapse, then consumption might stall altogether. My own guess, with one proviso, is that given the present momentum, consumption this year will not be a problem and that a real slowdown will come later.

The proviso is that there will be a short and successful war. Prolonged uncertainty or continuing conflict will bring forward any slowdown in consumption.

So what will happen to growth if consumption falls back? Do not expect much help from the rest of the world. The eurozone is growing more slowly than the UK – the European Central Bank revised down its forecast this week – so exports there will be pretty poorly in the months to come. Other markets might help a bit, but even the US looks sickly, so in terms of demand we are on our own. You can see three forecasts for GDP in the final graph – from the Treasury, the Bank of England and Barclays Bank. The Treasury range is by far the most optimistic. Expect it to be less optimistic when it is revised next month.

If the growth forecast is revised, the whole Budget arithmetic has to be revised. The plans outlined last November already involved tax rises and already involved pushing government borrowing to 2 per cent of GDP. There is no absolute limit on the amount that governments can borrow. Germany and France have both gone above the 3 per cent of GDP limit under the European Stability and Growth Pact this year. The US fiscal deficit seems likely to reach $400bn (£250bn), or 4 per cent of GDP, so you could say that in relative terms we are still towards the favourable end of the scale.

But a billion here and a billion there and suddenly we too could be talking real money. My own guess would be that 3 per cent of GDP, or £30bn, is the practical limit on UK government borrowing.

That will be the key figure to watch next month. First, we need to get the numbers for this year to see how far borrowing is going above Mr Brown's £20bn target. (If it doesn't rise, look out for clever devices that shuffle spending out of this year's accounts and into next year's.) Second, we need to get a number for next year and, more importantly, know how the numbers might be made to fit were growth to be at the bottom end of the credible range.

So we don't just need numbers. We need to have credible numbers. For his first five years as Chancellor, Gordon Brown was able to report better figures than he had initially expected. The reason was that revenue was more buoyant than expected. Now the very forces that made things turn out better than expected have gone into reverse and are making them seem worse. The fact that other governments are in a similar situation is small comfort for British taxpayers, who are the people who ultimately have to cope with the consequences.

And that, next month, will be the crucial element in the mix. How will we react to higher taxation? Will we go on trying to maintain our spending? If we do, then the economy carries on growing and the Budget sums remain manageable. But this comes at the cost of greater household debt that at some stage will have to be repaid. Or will we become frightened and cut back? In that case, the Government's debt becomes larger – but our own family finances improve.

So the issue next month may be partly one of "which way will Gordon jump?" But is it also "which way will we jump?" too.