THE TREASURY makes a point of rarely showing its workings, or airing its dirty linen in public, so we will never know exactly what happened in the days before Alistair Darling unveiled his pre-budget report.

There is, however, plenty of circumstantial evidence that much was borrowed – all right, stolen – from the Tories and intended as a preelection offering to voters, until Gordon Brown pulled the plug.

So, the best officials could do on the chancellor’s decision to double the inheritance-tax threshold for married couples was say it had been considered by Brown in the run-up to his last budget in March. Considered maybe, but rejected.

Likewise, the bombshell change in capital-gains tax (CGT), about which business is justifiably up in arms, was a sledgehammer to crack the private-equity nut.

In the summer, Darling pledged no “knee-jerk” action in this area. When Brown promised moves at the Labour party conference, the Treasury reminded us that Darling was alive to the “law of unintended consequences” and action would come only after consultation.

Preserving the CGT taper system, which meant entrepreneurs could sell businesses and pay only 10%, was important. But not, it seems, as important as shooting Tory foxes.

Treasury officials rolled their eyes when asked about a tax clampdown on wealthy “nondoms”, a saga that has run as long as The Mousetrap. But political needs must, and Darling was forced to deliver the Treasury’s most political set of announcements for years, albeit one that has unravelled quickly on examination of the small print. I don’t blame him entirely. He was only obeying orders.

What was left out said as much as what was in. Officials had been working on shaking up taxation of cars, hitting big gas emitters hard. Labour’s internal polling will have revealed that 4x4 and limo drivers could swing marginal constituencies. So it was shelved.

For me, the interesting question is this: if that was intended to be the preelection budget, what would the postelection budget have looked like? What could it still look like? Will we have an earnest Darling touring television and radio studios and, like a lawyer telling a family their rich aunt has left all her money to the Battersea Dogs Home, break the bad news?

This, in turn, brings us to the point on which most commentators have taken issue with Darling. Was his modest downward revision in the growth forecast for next year to 2%-2.5% (from 2.5%-3%), the Treasury’s considered view, or the minimum it could get away with without frightening the horses and sending the public-borrowing numbers ballooning further?

The downward revision is modest and temporary, with growth resuming its previously predicted path, 2.5%-3%, in 2009. There are changes below the surface. The Treasury expects real income growth to be weaker than it did in the March budget, so consumer spending will be more muted. Government spending is predicted to make less of a contribution to growth.

But despite the recent turmoil in credit markets, it is more upbeat about global economic growth in 2008, 5%, than it was in March, 4.75%. The International Monetary Fund, in contrast, is revising down its forecast, though only to 4.8%.

The Treasury does not expect consumers to retrench in response to the uncertainty. Seven months ago, it expected saving ratios of 5.5%-5.75% over the forecast period. Now it is looking for 3.5%-4.25%, close to recent lows.

How plausible is the Treasury’s story? Is it worryingly complacent? It did not quite support those headlines about grim times ahead. I remember when 2%-2.5% growth was a triumph.

The Treasury remembers what happened in autumn 1998 when it slashed its forecast for 1999 to 1%-1.5%, from an already modest 2%-2.5%, in response to the crisis then raging in financial markets. Even then it was roundly criticised for being too optimistic. But the economy grew by 3%, leaving the critics, and I was one, with egg on their faces.

The Treasury concedes some downside risks, including tighter credit conditions. It notes Britain has a larger financial sector than other economies, which could mean exposure to the problems in financial markets. It does not list the housing market as a risk, though, merely saying house-price inflation should continue to ease. The latest survey from Britain’s chartered surveyors suggests that weak housing activity and subdued prices will persist.

But officials also see risks on the upside. Britain’s financial-services industry has proved highly adaptable, and could absorb the shock from the markets faster than has been assumed.

It notes that households have nearly £7,000 billion of net worth, £4,000 billion in financial assets, and £1,300 billion of debt. There are £1,000 billion of cash and bank deposits. While “a small minority of households” have excessive debt, the net effect of a change in interest rates at the macro level will not be to send most families towards the abyss.

It seems to me, then, that the Treasury’s growth forecast is not unreasonable, and that this was not a case of burying bad news before the election that never was.

Where there is cause for concern is over the public finances. When critics say Britain has the biggest cyclically-adjusted budget deficit of any EU member (preenlargement) they are right. Denmark, Sweden, Finland, Ireland, Spain, Luxembourg and Belgium have structural surpluses. Britain has a bigger deficit than Italy or Greece.

We perhaps should not be surprised. Brown set up the public finances to meet the golden rule of only borrowing to fund investment. Government net investment will be £30 billion this year, rising to £42 billion by 2012. That implies bigger deficits – a “normal” situation in which the government borrows £30 billion, £40 billion or more – with the Treasury adding billions each time it revisits the numbers, as Darling did to the tune of £16 billion over five years last week. In normal circumstances we would be talking of tax rises to close the gap, not slipping the NHS an extra £2 billion in 2010 to make the numbers look better. The Institute for Fiscal Studies said there was now a 44% chance of government debt exceeding the 40% ceiling in 2010-11.

We may have had a change of chancellor, but some things have not changed. It is time they did.

PS: The Bank of England and Treasury do not always see eye to eye, but both appear reasonably relaxed at present. The Bank’s survey of household lending rates showed that two-year fixed-rate mortgages came down last month by about a quarter of a point to an average of 6.33%, while standard variable rate was unchanged at 7.69%. The expected follow-through from the credit crisis to lending rates is not yet happening.

Mervyn King, in a speech in Belfast, devoted most of his attention to the Northern Rock affair. He did also touch on the risks to inflation, identified in the Bank’s August inflation report, including heightened inflation expectations and rising commodity prices. He also said, just as Bank rate had not been used to insulate manufacturing from earlier changes in the world economy, “it will not be set now to insulate the banking system from the repricing of risk”. The Bank will monitor credit conditions “over the coming months” but these were not the words of a man itching to cut Bank rate.

david.smith@sunday-times.co.uk

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