Will 'Courageous' UK Budget Cause Double-Dip?

In the classic 1980s BBC comedy "Yes Minister" the scheming civil servant, Sir Humphrey, would tell the government minister, Jim Hacker, that his latest decision was "courageous" when he wanted to stop a change in government policy.

Hacker would get into such a funk at the thought of doing something courageous he would immediately reverse his latest policy initiative for fear of losing his job.

On Tuesday the UK Chancellor, George Osborne, unveiled one of the most courageous budgets in living memory, with the reforming zeal of someone who believes courageous decisions are why he gets up in the morning.

The question for his coalition government and the country is whether this moment of courage will go down in history as the moment Britain got back on track or the moment when it fell into a double-dip recession.

Since his speech at the Conservative Party Conference last autumn, Osborne has been warning that failure to cut government borrowing could lead to big trouble and has consistently warned that the UK was at a risk of becoming Greece mark two.

The message probably cost his party a clear majority in May's election, but with his coalition partners sitting uncomfortably either side of him in the Houses of Parliament, Osborne let the country know exactly what sort of pain lay in store.

V.A.T. to 20 percent, 11 billion pounds ($16.28 billion) to be cut from welfare spending, 25 percent cut from the budgets of nearly every government department and a big hike in capital gains tax.

His opponents claimed his budget was politically motivated and something he and his party wanted to do ever since they lost power in 1997, not a reaction to the mess the previous government left him with as he claims.

Darling: This is Dangerous

Former chancellor Alistair Darling told CNBC Wednesday that the decision to take money out while the economy remained so fragile was very dangerous.

He dismissed claims from Osborne that Britain is at risk of a Greek-style debt crisis and suggested a policy that is closer to President Obama's than Angela Merkel's.

Darling lost the election though, and the debate over Keynesian demand management in the UK has been lost by those who wanted further support for the country's fragile economy.

- Watch the interview with Alistair Darling above.

The big question is not over save or spend, it is what austerity will mean for the UK economy and market; and no one can really answer it.

"Economic growth is likely to be disappointing, if not disastrous. We expect GDP to expand by 1.5 percent next year, which is significantly less than the (downwardly-revised) 2.3 percent now projected by the Office for Budget Responsibility," according to the economic team at Capital Economics.

"Of course, if the scale of the fiscal tightening assuages concerns about the economy's health, it could have a positive effect on long-term growth and earnings expectations. But that remains to be seen," Capital Economics analysts added.

Other analysts see a more positive outcome.

"The emergency budget delivered an aggressive and credible program of fiscal tightening," Robert Barrie from Credit Suisse said.

"It should satisfy ratings agencies over the authorities' determination to stabilize and reduce government debt. And it should also produce a tight fiscal, loose monetary policy mix."

Welcome News for Business

Last autumn, many where asking where was the hope in Osborne's message of austerity, but for businesses other than the banks there was some welcome news.

A 2 billion pounds bank levy was accompanied by a promise to cut corporation tax by 1 percent a year until it falls to just 24 percent, which should go some way to offset the recent rise in the top rate of tax to 50 percent.

National insurance contributions by businesses will also fall and many in the business community like what they are hearing.

"The Coalition's plan for corporation tax sets a very positive course for the future direction of tax policy," Will Morris, from the Confederation of British Industry, said.

Business people are especially pleased with what the budget will do for the business climate.

"This budget has delivered what business was looking for, a clear plan to tackle the deficit, coupled with policies that create a competitive UK business environment," James Caan, the CEO Hamilton Bradshaw, said.

One area that there was little new thinking in was getting the banks to lend to businesses and consumers again.

Despite owning two of the country's top banks, neither this government nor the last have figured out how to get the industry to take the cheap money being pumped into the system and pass it onto those that desperately need it.

To be fair to Osborne and his government, only one member of the G20 has solved this problem: China.