Will the splurge work?

We have become used to dealing in £billions since the onset of the banking crisis. With the economy facing such a dire economic outlook, there is a sense that many more £billions should be thrown at the problem – but the danger is that, in our desperation for a solution, we rush headlong into potentially more destabilising circumstances.

The UK is in a particularly tricky situation, with the European Commission expecting our deficit to deteriorate to 6.5% in 2010 (the second highest borrowing forecast among the 27 member states), and the Financial Times reporting a probable rise in public borrowing to £120bn. This causes a problem with regard to credibility: will the stimulus be reversed to put the government’s house back in order?

If so – and the Treasury has so far hinted that tax cuts will indeed only be temporary – then the taxpayer is more likely to save the handout, neutralising the expansionary impact.