Budget week

On Wednesday Alistair Darling will tell us how he plans to repay the huge debt the government is currently accumulating. There are only two ways to do this: raise taxes or cut spending. He needs to do both.

In her blog, BBC economics editor Stephanie Flanders points out today that the deficit is not merely a result of the recession - it was there and growing before the downturn took effect. She says:

"On Budget day, the chancellor is likely to announce that he expects the government to borrow around £170bn in 2009-10 and 2010-11.

"That would represent a post-war high of nearly 12% of GDP. Borrowing was only around 6% of GDP in 1976, the year that Britain was forced to go to the IMF to bail-out its economy".

Raising taxes and cutting spending are difficult for any government; spending cuts especially so because for so long Labour has gained political capital from suggesting anyone advocating them wants to see doctors, nurses and teachers sacked. As John Redwood says:

"I am heartily sick of all these hand wringing interviews about how difficult it is to cut public spending. They usually ask people if they want to cut schools or hospitals, the nonsensical Labour spin. The “better” ones do go on to offer the interviewee chance to cut defence or some other public service.

"Businesses regularly have to cut their spending. They do not agonise over whether to cut production or the service they give to customers, as they know they need to sustain both if they are to stay in business. They debate whether they can buy their raw materials cheaper, how many people they really need to produce what they are producing, whether there is a smarter way to make it. They look at cutting what they spend the money on - staff, raw materials,semi manufactures, adverts, transport etc, not at cutting the final output or service".

It's going to be an interesting week.

UPDATE: The IMF now puts the cost of the UK bank bailout at £200bn.