By Nick Louth, writing for MSN Money, 16/04/2009 00:00

Crisis Budgets of history

"The only cheers in the House of Commons were voiced when a white china pitcher, containing orange juice, was carried in for the abstemious chancellor to sip during his long speech. In the expectant silence that followed, the House could hear the click of the key as Cripps unlocked his dispatch case - the same battered red leather case which had held Britain's Budgets since Gladstone."

This is how Time magazine described Sir Stafford Cripps, Britain's famously austere post-war chancellor, as he prepared to announce his 1949 Budget.

Though Britain's predicament was very different from that facing Alistair Darling 60 years later, the austere character and tone of the two Budgets may well turn out to be similar.

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Austerity returns
Unlike Darling, Sir Stafford had recorded a Budget surplus of £380 million for 1948, but it was one he was unable to spend. It had all been earmarked to repay national debts which resulted from World War II.

Rationing remained in place, four years after the second world war ended, and the price of meat, cheese, margarine and matches, and that great luxury - telephone calls - were to rise.

In Britain in 2009 rationing is long gone, but huge food price rises in 2008 and now the recession have brought scrimping and saving a new respectability.

The middle classes flock to discount chains Aldi and Lidl, pound shops are the only retailers expanding and millions dig out dusty copies of post-war recipe books. Shame on you if you do not boil up your roast chicken carcass for stock to make soup!

Counting the zeroes ... Darling wins
Great crisis Budgets are known for their huge borrowing overshoots, and Alistair Darling's second Budget will probably boast a record number of zeroes.

The government's deficit in 2008/09 is expected to be about £95 billion and will soar to around £150 billion this year - about five times what the government has recently borrowed in a typical year.

According to economist Roger Bootle of Deloitte, the government's forecast borrowing over the next five years will rise by £250 billion compared to that forecast just five months ago during the pre-Budget report.

However, huge revisions to numbers are not just a modern phenomenon. In his autobiography, The Time of My Life, former Labour chancellor Denis Healey recalls having been in office just three weeks when the Treasury gave him a forecast of the 1974/75 Public Sector Borrowing Requirement.

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Treasury blunders of yore
"Leaving aside all the changes made later in the year, [it] turned out to be £4,000 million too low. The magnitude of that one forecasting error was greater than that of any fiscal change made by any chancellor in British history," he wrote. As a result, he was faced with a Budget deficit of 5.8% of GDP, almost as high as the 6% which Darling now faces.

While Healey never faced the combined forces of severe recession and banking crisis which Darling has been wrestling with, he faced the worst inflation in British history, caused by a quintupling of oil prices after the 1973 Yom Kippur War, at 16%. Annual price rises went on to peak at 24.2% in 1975.

Depression-era Budget
The 1932 Budget - when the depression of the 1930s was perhaps at its deepest point - was perhaps that which most clearly mirrors Alistair Darling's current dilemma in fighting economic downturn.

Then, though, Conservative chancellor Neville Chamberlain had no truck with the idea that governments cushion downturns by expanding spending.

Faced with a falling tax take, he cut an already meagre unemployment benefit by 10%, which affected the 17% of Britons who had no work, and sliced 10% from the pay of public sector workers.

Chamberlain balanced his maiden Budget at £3 million, the lowest figure since 1924, by the simple act of suspending war reparations which were due from Germany under the Treaty of Versailles, but had not been paid, and the war debts owed to the US which were to be paid from those reparations.

After this was endorsed in the Treaty of Lausanne, this left the US taxpayer in the lurch, only able to squeeze a shattered German economy for the money it had lent to its allies.

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Wrong time to hit the trade brakes
Bold though this was, a more elementary error under Chamberlain was made - one which neither Darling nor any of his post-war forebears would have made - imposing a 10% tariff on all imports. That, together with similar protectionist moves across the developed world made the 1930s depression much more protracted.

Such a move would now be illegal under international trade rules.

However, the US Congress inserted something of similar motivation into its TARP economic rescue package this year when it stipulated that infrastructure must use "only American steel". The clause was later deleted.

Crisis Budgets in the modern era were perhaps less momentous than those of Chamberlain or Cripps, but Geoffrey Howe in 1981 and Norman Lamont in 1992 both faced simultaneous high inflation and high unemployment - a beast known as stagflation.

This tends to paralyse the economic toolbox because the expansionary measures needed to beat unemployment would worsen inflation and the contractionary measures to tackle prices would hit jobs.

Banking industry windfall tax ... if only we could
Lord Howe, as he now is, reacted by increasing income taxes and levying a £400 million one-off levy on banking industry profits. Oh, those were the days.

Gordon Brown probably had the luckiest time of all as chancellor, with 10 years in office and not a single crisis Budget to deliver. In his timing in stepping up to become prime minister he would have appreciated the words of Britain's first ever Chancellor of the Exchequer.

In AD1170, the Treasurer of England and Bishop of London was recorded as "Richard, Son of Nigel". He said: "For the highest skill at the Exchequer does not lie in calculations, but in judgment of all kinds."

Let's hope Alistair Darling manages to reflect those qualities next Wednesday as he grapples with Britain's worst post-war economic crisis.

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