What Darling should do

 So is the worst behind us? Have we bottomed out? Are we on the long slow haul to economic recovery? Well, that's what the Chancellor, Alistair Darling will be telling us this week, as he reveals how he intends to get us to pay for the record public sector deficits in the coming years. Is he right? It depends who you are. 

If you are a banker in one of the big international banks like Citigroup, JP Morgan or Wells Fargo, then you are whistling a happy tune as these insolvent institutions return to profitability. The fact that this has been based on massive injections of public cash - $45bn to Citigroup alone – won't bother you because you will be too busy calculating your bonuses. With trillions being injected into the banking sector in America and Britain, near-zero interest rates, and the Bank of England effectively printing money there is bound to be some response in the markets. Shareholders in bankrupt British institutions like RBS HBOS/Lloyds have seen a recovery in the value of their stocks. This has contributed to a modest recovery in the FTSE index which has crawled across the 4000 barrier once again. Some financial commentators even to see signs of life in the housing market. 

The City is looking for a budget that leaves them free to make money again, by avoiding any regulation on their behaviour. No windfall taxes on their bonuses for example, such as those introduced in America following he AIG scandal. Financiers don't want to see any curbs on tax avoidance schemes, hedge funds, private equity groups. Or any extension of the 45% tax band which applies on earnings over £150,000. But I suspect the plutocrats can sleep easily in their beds this week. This doesn't look like a Chancellor interested in banker bashing. 

So, if you are in finance and investment, you are feeling more optimistic than for many months. However, if you are in what politicians call 'the real economy', recovery is a very long way off. Manufacturing is still suffering job destroying carnage and likely to continue to do so for the rest of this year as unemployment rises to over three million by early 2010. Tens of thousands of jobs are being lost every week as even big name firms in the forefront of new technology like BT, Nokia, Toshiba announce record losses. 

Both the construction industry and the wind and wave power sector are in a disastrous state at the moment, with mass lay offs planned as projects are cancelled or shelved in the recession. Yet, there is a chronic shortage of homes in Britain and a pressing demand for renewable energy. The collapse in the price of oil has made many alternative energy projects uneconomic and even huge wind farms like the London Array are in danger of being shelved. The government appears to believe that the only renewable source of energy is nuclear power, which is why it is proposing to use public funds effectively to subsidise the import of nuclear power stations from France. 

The Chancellor should be increasing taxes on the very rich in order to finance increased spending by the middle classes and the poor. It is the failure of demand that is prolonging the recession. By allowing a disproportionate share of national wealth to go to a small number of immensely wealthy people, the government is depriving the high streets of buying power. He should be giving help to savers – especially the old – who have been devastated by low interest rates. Britain is desperately in debt and must regain the habit of saving if the economy is to stabilise. The Chancellor should also be addressing the distortions in the housing market before another bubble emerges. 

Estate agents claim that buyer interest is at record levels and that the bottom of the housing market is in sight. If so, now should be the moment for the Chancellor to remove the capital gains tax exemption which encouraged so many people to turn their houses into investments and pensions. He should remove the tax relief on mortgage interest which led to the buy-to-let boom. Why should we taxpayers be paying the mortgages of private landlords? And Darling should also signal that there is to be stricter regulation of mortgage lending so that people are not lured into taking on debts they cannot afford. The surest way to prevent the next housing bubble is to prick it before it starts to inflate. Unfortunately, this doesn't look like a bubble-bursting budget.

Instead, it is likely to be a budget for debt as British public borrowing leaps to 11% of GDP next year -  according to IMF figures - the highest in the entire G20. And it will be worse the year after that, as the national debt heads for the £1 trillion mark. The government is funnelling billions into a financial black hole month after month and can only replace it by more borrowing. This is going to lead to record public sector deficits for many years, according to the Institute for Fiscal Studies. It will mean big tax increases of over a thousand pounds a year for average families and a freeze on public spending. The Chancellor will try to delay the impact of the pay back until after the next election, so most of this will be in the fine print. This will be a budget for recovery which will set most us back a pretty penny.