The battle lines are drawn ...

The two great opposing armies of economic thought and analysis are clearly ranged against each other. 

On the one hand are those advocating a positive role for government spending as a stimulus to support the economy out of recession and back to sustainable levels of growth.  On the other is the more market-oriented approach emphasising the inefficiency of government action and the way in which large levels of public spending can crowd-out private sector investment and activity. 

Behind the lines of combat there are some ideological differences...

with recent times seeing a return to a much more traditional correlation between political and economic stance:  the centre left in broad terms returning to a Keynesian approach to climbing out of recession and the centre right rediscovering a more classic small government and market based agenda.

In truth the current challenge facing the UK economy and the government’s Budget decisions are less about the relative merits of alternative public/private relationships and more about the speed of transition from one system to another.  

The economics profession in the main seem to support a cautious approach in the transition – as evidenced by the number of ‘pro Keynesian’ signatories to the stream of letters of leading economists arguing either side of the debate - while the views of the government are clearly in favour of speed and decisiveness.   The reality is that this is not a good year to be introducing such a massive re-balancing of the economy.  There are risks.

In part we will judge the Budget on how deflationary its effects will be: with the consensus forecast for 2010 relying on a GDP contribution by net government spending of 1.5% and by the private sector of only some 0.5%, the scope for a Budget induced double dip is high.  But we also judge the Budget for the measures it introduces to stimulate private sector growth: the simple removal of government spending is unlikely to provide enough automatic response by private sector firms to fill the gap left by the state.  A return to higher sustainable growth in 2010 requires a carefully designed and executed set of policies to stimulate the market as a renewed engine for UK economic growth: these should focus on encouraging innovation and R&D investment as well as exports to non EU countries and employment creation by SMEs as well as the removal of some of the perceived bureaucratic barriers to enterprise.

If the strategy or tactics are mistaken or mis-judged the risk of collateral damage is high.