By Emmeline Saunders
The government faces more problems in the run-up to the election with the news that the economy is set to weaken early next year.
A forecast by the Centre for Economics and Business Research (CEBR) states the decline of the gross domestic product (GDP) registered in the third quarter was "at best misleading", as it was inconsistent with business surveys and labour market data.
As a result, the fourth quarter data "is likely to record a misleadingly strong bounce back, added to by some improvement in consumer and investor confidence, a gradual loosening of bank lending restrictions and the effects of a price war on the high street," CEBR's chief executive Douglas McWilliams said in its monthly Forecasting Eye.
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But economic prospects for next year are not so bright, if the reversal of the VAT cut goes ahead as planned on January 1st. This could squeeze disposable incomes again, which would come at a time when government spending is obstructed by the run-up to the election, putting large projects on hold.
The pre-Budget report, which is now planned for December 9th, has been postponed as ministers struggle to control the economy. It will be seen as the green light to an intense battle between the parties as politicians fight over economic policy for the next six months.
Mr McWilliams argued: "A more credible plan to cut public spending in the medium term than simply relying on wildly optimistic forecasts - as seen in the last Budget - is absolutely necessary."
The problem with this for chancellor Alasdair Darling is that this would retrospectively justify shadow chancellor George Osborne's comments on public spending.
"A reversal of the 50 per cent tax rate - a rise in tax that is actually likely to lose money - would be helpful but politically impossible. But a six-month extension of the 15 per cent VAT rate would be clever - it will not cost much if it helps sustain consumer spending and will in any case have no significant fiscal cost beyond 2010," Mr McWilliams added.
"And it would move some of the stuttering in the economy to after the election."
A weak economy could shatter Labour's hopes of survival. The spring Budget is planned for mid- to late March with a post-election Budget in late June. The general election, it is now thought, will be held on May 6th.