Here’s a possibility. It’s because they don’t believe the Budget forecasts. They think public sector borrowing might fall more sharply than the Red Book projects (pdf), with the result that the spending cuts contained in the Red Book won’t be necessary*.
To see why they mightn’t believe those forecasts, start with my chart, which is taken from various parts of the economic accounts released today. This shows the financial balances - savings minus investment, or net lending - of the public and domestic private sector.
You can see that these two are almost mirror images of each other: the correlation between the two since 1988 has been -0.94**.
Here’s the link between the two. The private sector is now running a surplus because of the credit crunch. Because of this, some people - in fact companies, as that’s where the surplus is - cannot borrow as much as they want. Because others are free to run surpluses, the result is that the private sector as a whole is running a big surplus - equivalent to 4.9 % of GDP over the last four quarters.
The necessary counterpart of this is that the government must run a deficit. I say “necessary” because across all sectors the financial balances must sum to zero - saving must equal lending.
In other words, the public sector is in deficit because the credit crunch has forced the private sector to run a surplus.
The mechanism here is straightforward. As credit-constrained firms cut inventories, capital spending and jobs, economic activity falls. That cuts tax revenue but increases public spending on welfare. (It also causes the government to run a looser fiscal policy, but this is only a small part of the increased budget deficit.)
Now, here’s the reason for optimism. As the credit crunch recedes, the private sector’s financial surplus will shrink as firms become freer to borrow. And the counterpart to this is that the public sector’s deficit will come down - possibly more quickly than the Red Book forecasts, and sufficiently quickly to avoid the need for big spending cuts.
This raises the question. If this is what the government believes, why doesn’t it say so in its Budget forecasts?
In a sense, it does. It forecasts that GDP will grow 3.25 per cent after 2010. Such strong growth is, I suspect, only possible if banks are lending again and firms are borrowing to invest - that is, if the private sector‘s financial balance is falling.
Where the mystery comes is in why this optimism is not embodied in the borrowing forecasts.
It might be because it is politically awkward to do so. Forecasting a big fall in the deficit requires one to forecast either that taxes will rise relative to GDP, and/or that spending (on welfare benefits) will fall even more than is currently pencilled in. Even the former would be politically embarrassing. Perhaps, they think, it’s better to forecast only small changes in spending and taxes and to project a pessimistic scenario for borrowing.
Now, I’m not making forecasts here. I’m not saying that the credit crunch will end swiftly and that public borrowing will fall.
What I am saying is that, insofar as there is an intelligent reason for Brown and Balls to deny the necessity for spending cuts, it’s because they believe a story like this.
Perhaps, then, the "lie" is not in the denial of the need for spending cuts, but in the Budget projections themselves.
* Perhaps what I mean is that they believe that there's a good chance that the deficit will come in below forecast. There is something utterly absurd about the Red Book projections in that these are point forecasts subject to humungous (but unacknowledged!) uncertainty. It would be better if Chancellors follwed the Bank of England's polciy of making forecasts as fan charts of probabilities, but I fear the meeja are too simple to accept such a device.
** It’s not minus one because of movements in the current account deficit - foreigners’ financial surplus. However, as these are small, I can ignore them for the sake of simplicity.