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Tightening purse strings

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Expect to have to tighten the purse strings until 2018.

The chancellor will be preparing his annual pre-Budget report at a time when no one, including the most expert of experts, knows where the British economy is going. We can all be certain that 15 years of economic growth have come clattering to a halt.

In motoring terms, the economy has screeched from fourth gear to reverse. No one yet knows the full effect of this manoeuvre, though it is unlikely to be good.

In the March Budget statement, Alistair Darling was still hoping for growth of up to 2% this year. The reality will be closer to just 1%. In 2009, there will be contraction of between 1% and 2%, with feeble 0.5% growth in 2010.

Moreover, this is the ‘consensus’ view. A more pessimistic outlook would see no return to growth for some years to come.

Local government has never been Whitehall’s favoured child. Although there have been above-inflation grant increases for most councils during the period from 2000 to 2007, the NHS and schools have enjoyed considerably bigger increases.

Councils have been their own worst enemy, managing to deliver ever-improving services with relatively constrained resources. The health service, by contrast, has received more money at least in part because of financial and service failures.

Looking ahead, it is now clear there will be a short-term competition between the government and the Conservatives to offer tax cuts and a Keynesian investment boost to the economy.

The result of such short-term actions, on top of the cost of bank bail outs and economic contraction, will be public borrowing of£100bn in 2008 and 2009. It is inevitable that the 2009 spending review will be the start of a long period of public spending constraint.

Local government can therefore expect exceptionally tight funding settlements in each year in the period 2011-12 to, at the very least, 2017-18.

It will take a long period, particularly if growth is sluggish, to bring public borrowing back to a reasonable level. Spending cuts will run alongside tax increases. We face the most difficult economic period since the 1970s.

Economic problems often trigger social ones. Councils will be the first to notice how unemployment and poverty generate new problems for the police, housing departments and social services.

Efforts to prepare for the medium term will be hampered by the fact that the downturn is unpredictable in terms of its length and impacts.

The government has received worldwide plaudits for its handling of the banking crisis. But coping with the decline of the real economy will be harder to turn into any kind of political success.

Moreover, voters will feel the results of economic failure in their pockets. Politicians at both the central and local level face major challenges as the world becomes a nastier and more difficult place.

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