You don't have to be a Keynesian to worry about the recent Budget.

There is no dispute that immediate fiscal tightening is required but the previous government's plans already implied a fall in the "structural" current deficit from 5.3% of GDP in 2009-10 to 1.6% by 2014-15, with an additional 2.3 percentage point cut in net investment. Chancellor Osborne could have concentrated on filling in the detail of proposed spending restraint while signalling that further action would be taken to achieve his new fiscal "mandate" of current balance by the end of the parliament, i.e. in 2015-16.
 
The Budget, instead, targets a much faster adjustment and a structural current surplus of 0.8% of GDP in 2015-16, implying overachievement relative to the mandate, probably to create scope for largesse in the run-up to the next election. There is a direct link between this target and the decision to raise the standard VAT rate from 17.5% to 20% from January 2011 – 0.8% of GDP implies a cash surplus of £15 billion in 2015-16 while the VAT hike is projected to raise £14 billion in that year.
 
The impact of fiscal tightening on growth is uncertain but there is credible evidence that tax increases inflict significantly more damage than cuts in current spending. It may be wrong, moreover, to assume that indirect tax hikes harm incentives less than rises in direct taxation: higher VAT boosts the marginal tax rate on consumed income and consumption, presumably, is the ultimate aim of most work and investment. (The 2011 VAT increase, representing a permanent change, should have a much larger economic impact than the recent rise, which reversed a temporary cut.)
 
The Chancellor estimates that expenditure reductions will account for 77% of total consolidation by 2015-16 but the proportion is smaller in earlier years – only 57% by 2011-12. The VAT hike and tax rises announced by the previous government are projected to raise £14 billion, equivalent to 0.9% of GDP, next year. Early spending cuts, moreover, are focused not on current outlays but rather investment – projected to fall by 16% and 20% in real terms in 2010-11 and 2011-12 respectively.
 
Fiscal risks to growth, however, do not imply that the Monetary Policy Committee (MPC) should refrain from normalising interest rates, if it is serious about meeting the inflation target. MPC member Adam Posen recently argued that the current overshoot partly reflects an "unanchoring of inflation expectations"; these may be further destabilised by the coming VAT hike. Until the Bank acts to reverse this drift, high inflation may continue to coexist with a sluggish economy.