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In a report to be published with the final communique, the IMF says that the G20 countries' economic plans carry "serious downside risks" for the global economy - and their leaders could do much more to promote global growth and employment.

The report says the policies that countries now plan to pursue carry "significant downside risks". If those risks were to materialise, the Fund reckons that global output could 3% ($2.25 trillion) lower than currently forecast, and an extra 23 million jobs could be lost.

The Fund's staff calculate that more constructive collaboration between countries on their economic and exchange rate policies would mitigate these risks, and increase global output by $1.5tn dollars over the next five years, relative to the path that countries are now on. It would also create around 30 million more jobs.

A crucial feature of this better future would be faster reduction of government deficits in countries such as the US, and more domestic-demand based growth in countries with large trade surpluses such as China and Germany.

In the "upside" scenario painted by the Fund, Germany's current account surplus would be more than 1% of GDP lower by 2013, than under existing plans. The average surplus in Asian emerging market economies would be 3% of GDP lower by that time. The US budget deficit would be 3% of GDP lower by 2014 than the IMF would now expect.

In a separate report, the World Bank estimates that greater collaboration along the lines suggested by the Fund would lift an extra 33 million more people out of poverty over the next five years.

In recent months, G20 countries have submitted their economic plans to the IMF - which would then assess what the net impact would be on the global economy.

"At face value", the report says, countries' plans "appear to deliver strong, sustainable and balanced growth." However, considering the past experience of recovering from financial crises, the authors believe that countries are being too optimistic in their growth forecasts.

Even if the growth does materialize, the IMF says that a number of rich country governments are not planning to do enough to cut borrowing. "Also, rebalancing of global demand was viewed as not being strong enough to sustain high global growth and achieve low unemployment."

The IMF was supposed to be telling the G20 whether their plans "added up". The answer given in this report is that they do - but the sum of the parts could be much higher.

In their Communique, the G20 leaders will for the first time make an explicit commitment to agree new minimum levels of capital for banks in time for the next Summit in Seoul in November.

UK officials say there will be no precise figure until then, but the statement will pledge that the capital buffer that banks are required to hold against future losses will be high enough to have prevented any major bank from needing government support in the financial crisis of 2007-9.

It doesn't sound like much. But it does set limits on where this immensely complicated financial reform effort can end up. There will be a similar commitment to raise bank liquidity standards, and set overall limits on leverage, or borrowing.

As expected, they have not agreed a timetable for introducing the new regulations. There will also be considerable debate on the details - not least, which liabilities will count as capital, and how liquidity is going to be measured.

As Robert Peston has written previously, many Continental European governments are worried about the economic effects of phasing in the new capital requirements too quickly, because European banks come into this with lower levels of capital than their American counterparts.

That debate has not been resolved here - and may yet continue after the Korean Summit in November.

Chancellor Angela Merkel is making much of the fact that the major G20 economies are close to an agreement to halve their deficits as a share of the economy by 2013.

But, as is usually the case on these occasions, the leaders will be signing up to a target they came here already pledged to achieve.

Assuming that they are talking about the total deficit, not the structural piece that is not expected to go away with economic growth, every government of a major economy represented here is pledged to at least halve borrowing as a share of the economy by 2013,

Before its recent austerity programme, the Germans had pledged to cut their deficit to 3% of GDP by 2013, from around 5.5% this year. But the new plans to tighten by an extra 1% of GDP over the next three years will put them well within the target.

President Obama has said that he will halve the deficit over the next four years. They are a bit fuzzy about whether this means 2013 and 2014 - but unless something very bad happens to America's recovery, economic growth should halve it as a share of the economy by 2013. What worries the financial markets is what happens after that.

France is behind its major allies in presenting a detailed deficit plan, but it too has promised to more than halve its deficit, from around 8% of GDP now to 3% by 2013. That is what Europe's Growth and Stability Pact demands. The Italians say their deficit will fall from 5.3% of GDP in 2009 to 2.7% by 2012 - which would be a year early.

There is a question mark around Japan: it had previously said it will cut borrowing from 9.3% of GDP in 2009 to 3.9% by 2014. But they have recently promised to accelerate the pace of deficit reduction - which would make their plans consistent with a pledge along the lines that Chancellor Merkel suggests.

And, of course, we cannot forget the UK. George Osborne's budget puts Britain on course to halve the deficit by 2012-13, let alone 2013-14: the deficit is due to fall from 11% of GDP in 2009-10 to 5.5% by 2012-13, and 3.5% of GDP the following year.

But it's interesting to note the former Chancellor, Alistair Darling could have signed up to this promise as well: his March Budget showed the deficit falling from 11.8% of GDP in 2009-10 to 5.2% in 2013-14.

If there is such a pledge, expect the Europeans - and our prime minister - to claim victory. Symbolically, it is important to him - and Chancellor Merkel - to have fiscal tightening feature prominently in the final agreement.

But, as the US Treasury secretary made clear in his remarks on Saturday, this debate is not just - or even mainly - about the balance between growth and fiscal tightening. It is about where growth is going to come from in the future - specifically, whether countries like Germany and Japan will do their part to support global demand, or continue to look to exports fuel their growth. That debate is very much alive here in Toronto.

Update 1817: We can now confirm that the Final Communique commits the leaders to halving their deficits by 2013 - though Japan has a get-out clause.

On the "growth versus budget cuts" debate, the Draft Communique suggests they are taking the path of least resistance. The language here looks mealy-mouthed, even by Summit standards.

The draft says: "(t)here is a risk that synchronised fiscal adjustment across several major economies could adversely impact the recovery. There is also a risk that failure to implement consolidation where necessary would undermine confidence and hamper growth."

Along with the deficit pledge, there is a promise to stabilise debt as a share of the economy by 2016. Once again, nearly all of the major economies were committed to halting the rise in their national debt by that point - most have the debt starting to fall a bit earlier.

Given that some countries will meet the targets ahead of schedule, the Canadian Prime Minister, Stephen Harper, said they should be considered "minimum fiscal targets".

What I'm waiting to see is the IMF paper, to be released with the Communique, showing how all these governments' economic plans add up to a balanced global recovery.

In many ways, the argument over the right way to support the global recovery here at the is the mirror image of the debate at the .

Back then the argument was that governments needed to act together to prevent another Great Depression. Now the worry is that they will hurt the recovery if they withdraw that support all at the same time.

But there is one crucial difference. In April 2009, any student of economic history could tell you which policies would maximise the chance of recovery - or at least minimise the chance of economic catastrophe.

The hard truth about today's situation may be that there is no perfect mix of policies that can guarantee a strong recovery after a financial crisis this severe, and a run-up in sovereign borrowing this large.

Put it another way: we could be damned if governments do cut borrowing rapidly - with the global economy still fragile - but we could also be damned if they don't.

You can make the argument any number of ways - let me do it, in shorthand, by referring you to a handful of seemingly disparate events of the past day or two.

The best growth money can buy

First was the downward revision to US growth in the first quarter, from an annualised rate of 3% to 2.7%. That may not sound too bad, especially compared to much weaker growth rates for the UK and the eurozone over the same period - but it comes on the back of very disappointing figures from the housing market earlier in the week.

Growth was probably stronger in the second quarter, but the housing figures have many economists muttering about a loss of momentum later in the year. And remember - this is still the "best recovery that money can buy". Last year's stimulus is still having effect. Next year the money will have largely run out.

But if you look across the Atlantic to Europe, the news isn't much better.

Irish hangover

If there's a country in the world that has taken the tough decisions on borrowing, it is Ireland. As I've written in the past, the Irish government cut spending or raised taxes by more than 5% of GDP in 2009 alone, even as its economy was heading off a cliff.

Reporting on its latest consultations with the Irish, the IMF begins by pouring praise on the government, using words like "assertive", "resolve" and "credibility" in describing what the government had done - and how it had been received in the markets.

But that's about as good as it gets. The report goes on:

"Ireland is likely to emerge from its output contraction into a period of relatively modest growth potential and high unemployment.... The improved global outlook will help, but to a limited extent."

Finally, "home-grown imbalances from the boom years will act as a drag on growth. The unwinding of these imbalances--arising from rapid credit growth, inflated property prices, and high wage and price levels--will limit the upside potential."

So, Ireland may have done all the right things as far as the sovereign bond markets are concerned - the financial crisis has still left it looking at a bleak three to four years.

Not everyone is in the same boat as Ireland. But all governments are under pressure to demonstrate - to their citizens and to international investors - that they can both get their public finances in order and achieve a decent recovery.

As the Spanish government discovered recently, the promise of fiscal austerity, with no growth for years to come, is not much more credible to the markets than the promise to keep on clocking up the debt. Today the cost of insuring against a Greek sovereign default hit an all-time high.

The G20 leaders will paper over their differences in their final communiqué on Sunday - they can't paper over the fact that this crisis has left them very few good economic options over the next few years.

I am sitting in the bowels of a University of London building listening to Robert Chote dissect .

So far the most striking figure from the IFS post-mortem briefing is this: applying the planned squeeze in public spending evenly across departments would require an average cut of 14% in real terms by 2015-16.

The only reason we are talking about 25% cuts for most departments is the decision to protect the NHS.

That is a very expensive bit of protection. The chancellor this morning said that we could soften the blow for the ³ÉÈË¿ìÊÖ Office and the rest by signing up for further benefit cuts instead. As the scale of the cuts becomes clear, I wonder whether the NHS will be put back on the table as well.

Update 1405: According to the IFS, unprotected departments like the ³ÉÈË¿ìÊÖ Office and environment could have their budgets cut by as much as a third, if the NHS and overseas aid budgets are protected from real cuts, and defence and education are cut by less than others, as indicated by the chancellor.

The think tank calculates that this real cut for every other department would fall to 25%, if the spending review could identify another £13bn to cut from the benefit bill.

The total benefit bill is £270bn, but that includes the basic state pension and local authority-financed expenditure. There is about £154bn that could plausibly be cut.

Protecting ONLY the NHS and aid, and cutting this same £13bn from benefits, would reduce the average cut for other departments to 20%.

Update 1440: On the basis of the inflation forecasts included in the Budget, the IFS reckons that the decision to uprate most benefits in line with the CPI measure of inflation will amount to a 5% cut in these benefits, in cash terms, by 2015.

That is because the CPI typically rises more slowly than either the RPI or the other index previously used for uprating some benefits. The CPI excludes housing costs. It is also calculated slightly differently (for the aficionados, it's the difference between an arithmetic and a geometric mean).

So this is indeed a cut in benefits - which accumulates over time. But that should not be a surprise - given how much (nearly £6bn) that this one measure is expected to raise.

However, the government will be more embarrassed by another IFS conclusion, that the changes in benefits announced yesterday will significantly raise the number of households and individuals in the UK facing very high marginal tax rates on their earnings.

That was always inevitable, given that the Treasury was trying to save money by targeting benefits and tax credits more closely on lower income households. That necessarily means taking money away more rapidly as earned income goes up, meaning very high effective tax rates on that income.

However, it is not good news for Iain Duncan Smith and also many senior Liberal Democrats who, before the election, made much of the fact that the poorest people in society can face the highest tax rates. Thanks to yesterday's Budget, there are going to be a lot more of them.

Update 1500: As I noted here yesterday, the charts showing the impact on households of different incomes of the Budget included pre-announced changes such as Labour's National Insurance change, due to come in next year.

That turns out to have had an even larger impact than I thought.

Excluding those previously announced changes, the IFS says that the Budget yesterday was not progressive. The richest households did not pay relatively more.

Yesterday's Budget looks even more regressive when you consider the impact later in the Parliament, when the benefit changes have greater effect.

This is, again, inevitable, given the Budget's reliance on raising indirect taxes like VAT, and on cutting spending on means-tested benefits.

This conclusion would be even clearer, if it were possible to incorporate the housing benefit changes into the calculation (which, sadly, it isn't.) And - of course - we can say the same of the spending cuts to come in the autumn.

I just asked Danny Alexander what the government would do if Mr Osborne - and the governor of the Bank of England, and all those bond market vigilantes who wanted to see this kind of attack on the deficit - if all those people turned out to be wrong. What would he do if the economy responded as Japan's did to an increase in consumption taxes, years after its financial crisis?

Surprise surprise, I didn't get an answer: Mr Alexander stuck to his conviction that it would be even riskier to the recovery to delay.

Mr Darling used to say that any unexpected improvement in the public finances would be channelled into reducing the deficit. There was no corresponding promise from Mr Osborne today, saying that he would use any good news on borrowing to cut spending less - or take back the rise in VAT.

But speaking to us, the chief secretary did not deny that the new OBR forecasts in the Budget show growth a bit weaker in 2010, and unemployment about 100,000 higher.

As I said in last night's post, it's difficult to draw straight conclusions from the revisions in the forecasts because last week's predictions, in effect, incorporated assumptions about interest rates which might not have panned out if Labour had won the election. We'll never know.

However, very few people would argue that tightening on this scale would NOT affect growth, at least in the short run. That is probably why Mr Alexander didn't quibble with the figures I put to him.

It is also quite clear, from the forecasts in the Budget book, that the economy will now be operating with spare capacity for longer than we thought - in the parlance, there will still be a positive output gap in 2014-15 because the recovery, over this period, is expected to be a bit weaker than we thought.

Interestingly, that means that cyclical borrowing - the borrowing due to slower growth - has actually gone up in this red book, by £9bn a year in 2014-15, even as Mr Osborne has cut spending or raised taxes by £37bn. Expect Labour to make much of that figure - and don't expect them to put in the crucial caveats.

The government view is that all the short-term pain - economic and political - will be worth the long-term gain, in Britain's credibility with the markets and possibly its long-term potential growth. So, presumably, does Mervyn King. But Mr Darling isn't the only one who worries about the economic consequences of tightening policy on this scale. We have all to hope that they are all wrong - and Mr Osborne is right.

Update, 08:30, 23 June: Almost every page of the has information on it that on any other day would be a front page story. Heaven knows when any of us will have time to read them all. But if you've only got time for two, here are the two charts I'd pick:

The first is on page 15. It shows how far the chancellor has had to stray from his desired 4:1 ratio of spending cuts to tax rises, especially in the first few years of this Parliament.

True, he has stuck to a nearly 4:1 ratio for the new measures introduced today. But as we know, that is not the half of it, because you have also to include all the measures previously announced by Mr Darling.

When those are taken into account, spending accounts for only 57% of the tightening in 2011-12, and 64% in 2012-13. The number only gets up to 77% in 2015-16, as a result of (presumed) further spending cuts in that year which will not be part of the autumn review.

As Robert Chote has concluded, the government seems to have looked at the implications of sticking to 80% spending cuts in filling the slightly larger structural hole identified by the OBR last week and decided it couldn't be done. Bad though it will be for Whitehall in the next few years, departments can console themselves that it could have been even worse.

The second chart is on page 67, and shows the impact of the measures announced by Mr Osborne on different parts of the population, as a share of income. This supports the chancellor's claim that the pain is being evenly spread - and the richest are paying most.

However, as many have pointed out, the chart cannot and does not include the impact of spending cuts, which will tend to fall heaviest on poorer households and regions. And there is an even more obvious point to make about this table - which is that the bottom decile may not be suffering the biggest relative hit to income, but they are still taking a larger hit than almost any other group.

As a share of income, the highest earners will pay the most. But because the charts, somewhat conveniently, compare the system today with the system of taxes and benefits that will be in place in 2012-13, they include the impact of Labour's National Insurance rise (though presumably not Labour's other tax rises, like the introduction of the 50p rate, which would greatly increase the hit on top earners.)

Regardless, it's clear that the worst off will be hit worse by these changes than the middle classes, primarily because of the rise in VAT, which is only very slightly offset by the income tax cut. That is probably because relatively few people at this point in the income distribution earn enough to be paying income tax now.

PS An earlier version of this post had different charts on it, these have now been changed.

The growth forecast for next year has gone down - from 2.6% to 2.3% but growth in 2013 and 2014 has been revised slightly up.

The chancellor says that debt as a share of national income will peak at 70% in 2013-14, not 80% several years later, as Labour had planned.

Mr Osborne is planning to "over-achieve" his target of balancing the structural current deficit by 2015-16 - though it's worth noting the forecast period is a year longer than the likes of the IFS had thought. That extra year means he is not tightening quite as much as the headline figures suggest.

The forecast is for a surplus on the structural current deficit of 0.8% in that year, which is roughly the margin for error that Mr Darling used to employ. That is probably why the OBR can say they have a more than 50% chance of hitting their goal.

Update 1315: Uprating benefits to the CPI measure of inflation rather than RPI is a big deal - at a time when the RPI measure has gone up by 5.1% in the past year - while the CPI has risen by 3.4%.

Quite apart from the many other benefit changes Mr Osborne has announced, this change will feel like a significant cut in living standards for households that are dependent on benefits. Research has tended to show that the cost of the basket of goods bought by poorer households often rises faster than the basket of goods included in the CPI.

Update 1330: The chancellor keeps pointing to the fact that the OBR has raised the estimate of the structural deficit. As he says, this has gone up by £12bn, or 0.8% of GDP, in 2011-12. That provides a neat way to explain the VAT rise, which will raise a very similar amount - even though he and Mr Cameron had so few "plans" to raise it only a few weeks ago.

However, even before today's decisions, it's worth remembering that the revision for future years was much smaller than this. The forecast for the structural deficit in 2014-15, in the OBR's report, only rose by 0.3% of GDP, or about £4bn. It's hard to know without seeing the Budget book, but it looks as though he is raising through VAT what he has not raised from capital gains, where the change is less dramatic than expected, netting only £1bn according to the chancellor.

Update 1343: The red Budget book - it's gone back to being red again - shows the chancellor has tightened policy by an eye-watering £40bn a year by 2014-15. As he told MPs, 77% of this will come through faster spending cuts, the rest through higher taxes. Of that, £37bn comes directly from measures announced today, and £3bn comes indirectly, in the form of lower interest spending on the government debt.

When we consider that this is on top of Labour's plans to squeeze by more than £73bn, in 2014-15 money, over the same period, that is a large number.

There will be plenty for everyone to pore over in this Budget for months and years to come - but no-one can accuse the chancellor of lacking courage in his convictions.

Update 1400: The basic breakdown of spending, benefit and tax changes is as follows:

I said that Mr Osborne was tightening by £40bn by 2014-15 - £8bn of that will come from net tax increases. In effect, the rise in VAT and the bank levy are paying for net tax cuts elsewhere.

More than a quarter of the savings - £11bn - will come from the benefit changes he has announced today. Of that, more than half - £5.8bn - will come from that one change of uprating benefits in line with the CPI instead of RPI.

That means that government departments are looking at additional cuts of £17bn a year by 2014-15. In his speech, Mr Osborne said that this would mean a cumulative cut for unprotected departments of 25%, compared to a cut of 20% under Labour's plans.

George Osborne may or may not deliver a memorable Budget speech tomorrow - but in two key respects his first Budget has already broken the mould. Because we now have a coalition government, the key decisions had to be taken with a Liberal Democrat in the room. Because we now have the Office for Budget Responsibility, the economic thinking behind those decisions is going to be there for all to see.

By all accounts, coalition government has introduced a degree of discipline to the entire process. "It's the end of government by sofa", was the way one senior official put it to me, with a sigh of relief, when the Budget negotiations were already well-advanced. The need to keep Danny Alexander, the Liberal Democrat Chief Secretary, in the loop meant much less scope for last-minute stitch-ups, or 3am additions the morning of the speech.

The OBR had to be in the loop as well, because it needed to decide how Mr Osborne's policies would affect the forecasts it made last week. If the chancellor announces big new tax increases on Tuesday, the change in the OBR's economic forecasts may not steal the biggest headlines. But they will make for interesting reading all the same.

Looking again through , published last week, I am struck by the amount of detail. For the first time, in an official forecast, we have year-by-year forecasts for house price inflation through to 2014-15 - and unemployment. And financial sector profits. We also know exactly what it is assuming will happen to short and long-term interest rates over time.

This is good news for journalists - and a great step forward for transparency. But it also means that we will find out some of the most interesting news in the Budget, after Mr Osborne has sat down. Because only then will we see exactly what the OBR thinks the impact of his tax increase and spending cuts will be on the broader economy.

Of course, the forecasts for growth and unemployment will come laden with political implications - Labour is already flagging up the fact that growth will be revised down next year and probably after that as well. Unemployment may look higher in the short-term as well.

Mr Osborne's people say it's not a fair comparison, because last week's forecasts assumed away any negative bond market reaction to cutting borrowing on Labour's slower pace. The reason is that they used current market interest rate expectations to derive those forecasts for future borrowing rates, which now obviously build in an expectation of Tory-Lib Dem cuts - not Labour ones.

There is something to this, but only Sir Alan Budd knows how important this distortion really is.

You can find many people in the markets who agree with the Conservatives' long-running assertion that Britain would have struggled to find a market for its debt if the old government had stuck to its path for deficit cuts. But you can also find people who think the fear of a run on gilts is overdone.

Whichever view you take, it is just that - a subjective view. Precisely because the road was not taken, we will never know where it would have led.

Only Sir Alan and the other members of the OBR know whether they think Mr Osborne's actions, on their own, will be a net positive for economic growth next year or a net negative, in the short run. My guess - and hope - is the explanation accompanying tomorrow's new forecasts will make it fairly clear.

So much for the (politically interesting) fine print. What about the headlines?

On borrowing, of course everyone will be looking for the chancellor's target for the structural budget deficit in 2014-15, and especially the part of the structural deficit that is not due to spending money on public investment, the so-called structural current deficit.

As I outlined last Tuesday, the latest OBR forecasts have probably left Mr Osborne looking for at least £25bn in further tax rises or spending cuts if he wants to take that structural current deficit to zero over the Parliament. That's a bare minimum. The chances are that the figure will be well over £30bn.

If he wants to stick to a 4:1 ratio of spending cuts to tax increases, he could simply accept Labour's planned tax rises and plan to achieve all of that additional £30bn-plus tightening through spending cuts.

But, we already know he wants to avoid some of Labour's National Insurance increase, and raise personal income tax allowances by £1000. (Kudos, incidentally, to my colleague Hugh Pym, who gave me this piece of Mr Osborne's Budget plans when the ink was barely dry on the coalition agreement, back in early May).

Higher taxes on air travel, and reforming capital gains, can and will help him square the circle. The big question is whether he will need to look elsewhere.

Last week I suggested that the government had many good reasons to avoid a big rise in VAT - even (or especially) one that is pre-announced for next year. After all, that is exactly what Japan did, some seven years after their financial crisis started, with disastrous consequences.

For that reason, I had thought it more likely Mr Osborne announce only a conditional rise in VAT - which would kick in only if certain deficit targets were not met - or that we would see Mr Osborne announce plans to devise and implement a comprehensive carbon tax instead of a rise in VAT.

But, clearly, this is not the accepted view of most - let's face it, any - leading commentators. Either this government has pulled off the most elaborate exercise in expectations management in living memory, or the chancellor has decided he does have to raise VAT in this Budget after all.

However even if VAT does go up, we know for sure that the bulk of the work is going to be done through spending cuts, about which we will surely hear only a few choice nuggets in the Budget. Anything else would be pre-judging the results of all that public consultation over the Spending Review, which is due to reach its conclusions by the second half of October.

The heated talk in Westminster is that this will be a "game-changer" Budget - one that sets the contours for government spending and taxation for many years to come. That may well be true. But it feels like we've had a lot of game-changing statements from British chancellors in the past few years.

Arguably, it was the pre-Budget report for 2008, with its devastating revisions to the scale of UK public borrowing long into the future, which truly set us on the road to this point.

It's worth remembering that around two-thirds of the "tough choices" being announced by the chancellor in this Budget have already been sketched out by his predecessor, in the past few Budgets and pre-Budget reports.

Yes, Mr Osborne's first Budget speech will be another step in the road toward decisions and policies which will indeed change our government - and our economy - for years to come. And yes, he will be giving us some important signposts for what is to come. But we're not there yet, and nor is Mr Osborne.

As he - and Alistair Darling - know well, the really tough decisions don't come in setting the headline spending totals, but in deciding how, exactly, they are going to be met. On that larger task, this government has moved further than its predecessor, with its £6bn spending cuts and its lists of cancelled projects. But when Mr Osborne sits down on Tuesday he will still have barely begun.

The timing of is hardly accidental. The Chinese have said they will "increase the flexibility" of the exchange rate "to benefit the domestic economy".

But in the very short term, it is in Toronto where the benefits will most clearly be felt.

A few months ago, the battle over the exchange rate threatened to blow up this week's G20 Summit in Canada. The US Treasury Secretary, Tim Geithner, took the first step towards defusing the issue, with his decision in April to delay a politically charged report to Congress which would have labelled China a "currency manipulator".

With this statement just days before the Summit, China have now rewarded his patience. As usual, the wording is vague. It doesn't even mention the dollar. But the assumption must be that China plans to move back to the policy of allowing its exchange rate to appreciate in real terms against the dollar.

Between July 2005 and March 2008, the yuan appreciated 18% in real terms against the greenback. But then Beijing got spooked by the collapse in global exports, and re-instated a rigid peg.

As I've discussed in the past (see my post from Davos earlier in the year), a rising yuan won't get rid of China's structural excess of savings over investment - so, by extension, it won't get rid of its massive current account surplus with the US.

Also, as far as the Chinese are concerned, the weakening Euro has already pushed up the trade-weighted value of the yuan significantly. The rise against the dollar in the months ahead may be slower than many Congressmen would like.

Thanks to the recession, China's current account surplus has gone from 11.3% of GDP in 2007 to 5.8% in 2009. The country even had a trade deficit at the start of this year, for the first time since 2004. The question is what happens next.

Tim Geithner - and others in the administration - fear that the surplus will go back up as the global recovery gathers pace. Or, at the very least, not fall any further.

That's a problem, if you're looking for external engines to drive US growth - so it doesn't have to rely on a massive budget deficit for many more years to come.

The exchange rate is only a means to the end of more balanced growth. And as we saw from President Obama's recent letter to the G20 leaders, published in the Washington Post, the US is worried that the widespread swing toward fiscal austerity could put that balanced future at risk.

As I mentioned in an essay for the Today programme on Saturday, when Chancellor George Osborne announces a faster programme of deficit cuts in the Budget on Tuesday, he won't be the first finance minister from a major European country to do so - he's almost the last. Italy, Spain, Portugal and Germany have all unveiled new austerity plans in just the past few weeks.

For some, this is all good news. For them, Keynes might have been the man for 2009, when the biggest risk was another great depression. But now, they say, that risk has gone away: and a mountain of government borrowing has taken its place. If we don't want a government debt crisis to replace the crisis in the financial system, ministers need to show they can get a grip. Everyone can agree that they don't want to be another Greece.

But there are others who say that governments have been too quick to change course - especially in countries like Germany, which are not borrowing anything like as much as the UK. The worriers say the G20 is spending too much time second-guessing the markets, when the risk of another depression has not really past.

After all, the recovery - on both sides of the Atlantic - is still fragile. Lending to business is weak. Investors are still willing to lend to most governments at very low rates. And prices are falling in Ireland and Spain.

True, China, Brazil and other emerging economies are taking off again. But in the industrial countries, they say there's still a question whether the private sector can grow under its own steam.

These doubters include Martin Wolf, the FT commentator whom Mr Osborne tapped this week for his commission on bank reform. Paul Krugman shares his fears - and, as we are seeing, so does the US president. It will be interesting to see what they can agree to say on this subject in Toronto.

In the debate over government borrowing, the world has moved a long way in the past few months - and it has moved in Mr Osborne's direction. The only question is whether the global economy has moved as far.

Are public-sector pensions "unfair" and "unaffordable"? , and many private-sector workers, with little or no pension to look forward to, would probably agree. But most public-sector workers in line for these pensions probably think they are no more than they deserve.

That may be because the members of these schemes have no idea what they are worth. But the same can be said of most of the public-sector employers paying into these schemes - and, apparently, Nick Clegg.

This is a horribly complicated subject. But it is also one in which understanding the problem has to be the first step to a solution. If Mr Clegg really wants to have a debate about this issue, there are a few things that he and everyone else needs to know. You might also call them home truths.

³ÉÈË¿ìÊÖ truth no 1: the rise in the "cost" of public-sector pensions, which so excited the deputy prime minister when it appeared in , has almost nothing to do with the "unfairness" - or their "unaffordability".

The report showed the Treasury cost of public-sector pensions rising from £3.1bn in 2008-9 to £9.4bn in 2014-15. But that - quite literally - is not the half of it.

According to the National Audit Office, the two million-odd people receiving public-sector pensions from one of the four big schemes received £19.3bn in 2008-9. Employee contributions covered £4.4bn of that. The remaining £14.9bn was paid by the taxpayer: of which £12.5bn came from (public-sector) employer contributions and the remaining few billion coming from the Treasury.

The fact that the Treasury cost is due to more than double over the next five years tells you nothing about the future sustainability - or otherwise - of the system. All it tells you is that these are pay-as-you-go schemes: there is no pot of money paid in by workers in the past that can now be put toward paying their pensions.

The money for those payments comes from today's workers. If it turns out that there are more pensions to be paid than there are contributions, the Treasury has to cough up.

One reason why that £3.1bn number is going to go up so fast over the next few years is that there were a lot people who joined the public sector 30-40 years ago who are now retiring. So - pension payments are going up.

The other reason is that the Treasury doesn't think that total contributions by employees and employers are going to rise as they have in the past, because public-sector wages are going to be flat, and the number of people employed by the government is (surely) going to fall.

Mr Clegg said "we cannot ignore a spending area which will more than double within five years." If he wants to bring that figure down dramatically, the best advice to him might be to expand the public-sector workforce and massively increase their pay. In five years' time, public-sector pensions probably wouldn't "cost" the government anything at all. In fact, the Treasury might even be making a profit.

As it happens, this is what happened in the NHS over the past decade - pay and employment shot up. The result was that the "cost" of their pension scheme disappeared. In 2008-9, you might be surprised to hear that the NHS pension scheme ran a big surplus: it paid in £2.1bn more to the Treasury than it paid out.

Does that mean that we can leave the NHS out of this tough-minded review of the cost of public pension schemes? Of course the answer is no, because all of those new NHS employees are getting some big pension promises in return for those contributions, which sooner or later the Treasury is going to have to honour.

Which leads me to...

³ÉÈË¿ìÊÖ truth no 2: in counting the cost of public-sector pensions you can't just look at what's being paid out today - you have to look at the costs that are being built up for the future. That number is a much larger number, and there is almost nothing that Mr Clegg or anyone else can do to bring it down. Fortunately, it is a silly number.

In that same report, the OBR repeated the government's estimate of the net present value of future payments to public-sector pensioners - which stood at £770bn at the end of 2007-8. Those are the promises that the members of public-sector pension schemes have already built up. All the experts who've looked at this issue in the past - inside and outside the government - have concluded that those promises are untouchable.

As the French president demonstrated today, when it comes to state pension benefits it's easy for governments to change the terms of the deal - and effectively renege on past promises. President Sarkozy has reduced the value of every French person's entitlement to a state pension - at a stroke - by raising the retirement age to 62. Margaret Thatcher did something even more dramatic when she decided to link the basic state pension to prices rather than earnings.

Governments can do that with benefit rules. They can't retrospectively re-write the terms of people's employment contracts - even if the employees work for them.

In Tuesday's panic over the OBR report, some newspapers breathlessly speculated that some public-sector pensions in payment might be cut. That will never happen. It would go straight to the European Court of Human Rights. In the view of most experts, so would any effort to renege on pension promises that have already been built up but are not yet being paid. Even where public-sector schemes have raised the retirement age from 60 to 65, they have usually done so in a way that maintains the value of the entitlement they have already built up, if they decide to retire at 60 after all.

Put it another way - that £770bn isn't going anywhere. It's a debt that the government will have to pay off over time. That's the bad news. The good news is that it doesn't have to pay out that £770bn any time soon. And, because it is a government, it has a capacity to manage that debt which the average company doesn't.

That is why even the £770bn isn't a good measure of the "cost" of public-sector pensions. You could calculate an even scarier number for the "cost" of future entitlement to free health care for every British citizen now living - or the "cost" of educating all our children.

There are two other - better - measures of the "cost" of public pensions.

The least scary is the annual cost of servicing these schemes, as a share of GDP. On reasonable assumptions about rising life expectancy and future growth in earnings and contributions, that is projected to rise from 1.7% of GDP today to 1.9% in 2018-19, before falling back to 1.7% by 2059-60.

That doesn't look so bad.

But - that number also assumes that the public-sector workforce remains unchanged, while the UK workforce grows by a fifth, meaning the public share of the workforce falls from 21% of the workforce today to 16% in 50 years' time. That is perfectly possible; after all, we are supposedly about to rethink what the public sector is all about. But, in an ageing society, it is unlikely to happen without that kind of radical reform.

In a report out in a few months, the NAO is going to look at how the running costs - as a share of national income - go up if you make different assumptions. It will be interesting to see what they say.

To respond to the first part of Nick Clegg's statement on Monday - that forecast for spending might give you a rough guide to the affordability of public-sector pensions. But it can't tell you whether they are fair.

No single number is going to decide that argument either way, but there is a number in the OBR report that might start that debate in the right place: that is their estimate of the "current service cost of public sector pensions", which they reckon was £26bn in 2007-8.

In effect, that tells you how much the discounted value of all those pensions has gone up in a single year - how many new promises to pay money in the future the Treasury has taken on in a single year. (This is all horribly complicated, but think of it as the cost of buying a long-term annuity to pay off the 1/60th or 1/80th of salary that each member of these schemes has clocked up that year for his future pension - which can never be taken back.)

You can debate whether £26bn is the right number. You'll be relieved to hear that I'm not going to share that debate with you right now. But assume it's in the right ballpark. What the OBR is saying is that every year we, as taxpayers, are giving the five million or so people who work in the public sector rock-solid guarantees of future pension payments which, on the open market, would cost them at least £26bn a year.

In exchange for those promises, the individuals themselves are contributing £4.4bn, and their (government) employers are contributing £12.6bn - meaning a net subsidy by the Treasury of at least £10bn a year. As I say, many would put the number a lot higher, because long-term interest rates today are so low; but let's not go there today.

Economists aren't big fans of hidden subsidies - especially when they are hidden even from the recipients themselves. Ask the average employee in the public sector how much his pension is worth, he or she is unlikely to say that it is worth another 30-40% of their gross salary. But that is almost certainly what it would cost a private-sector employer to offer a pension on the same terms.

As it happens, no private-sector employer would ever have to offer it, because the public-sector employee they are poaching doesn't realise the value of what they are giving up. But that is rather the point.

The long-term expenditure forecasts tells us we can "afford" to maintain this hidden subsidy to one-fifth of the workforce. The law tells us that we can't take back any of the promises that have already been made.

The debate of the coming months must be about the future: whether it's politically sustainable, at a time of shrinking pension provision for everyone else, for the Treasury to make the same promises to public-sectors workers for many years to come - and if so, who is going to pay?

So much for the numbers. What is the government going to do about them?

At first glance, you might think the OBR's report had not advanced the argument about the deficit one inch.

If, like Mr Osborne, you have long believed in more rapid deficit cuts, you will have found plenty of supporting evidence in the OBR report. But as we have seen, if you're like Alistair Darling, and you have always thought that faster cuts were risky for the economy, you might well decide the weaker growth forecasts in the OBR report had rather strengthened your case.

But it's not just a question of paying your money, and taking your choice. There is real information in the report that sheds light on the difficult decisions ahead.

Borrowing is lower than we thought - about £3bn lower by 2014-15. The key is that the OBR thinks we have less room to grow our way out of that debt than before - meaning the structural hole is that much bigger.

As a result, the IFS calculates that the permanent hole in the budget associated with the crisis and the recession has risen from 4.7% of GDP, or £69bn in today's money, to 5% of national income - or around £74bn.

It's not the monster revision that some ministers might have led you to expect. It's also about half the average forecasting error for predicting the overall deficit - let alone the "structural" hole.

But remember - these are central forecasts. Where the borrowing numbers are concerned, moving away from a deliberately cautious approach is said to have roughly offset the impact of lower growth.

Given that Mr Osborne is supposed to be aiming at a more than 50% chance of hitting his target - you might expect him to tighten policy by more than £74bn between 2011 and 2015 - meaning a tightening of more than £24bn on top of the £51bn of cuts and tax rises that Labour has already put in place.

To "over-achieve" his target of balancing the structural current deficit - by the same margin that Mr Darling planned to achieve his deficit target (in his case, over a longer time frame), the IFS say that Mr Osborne would need to tighten by an extra £34bn between now and 2015 - or £85bn in all.

Is that do-able, without raising taxes? The IFS says it is. But when you look at what it would actually involve, it looks like the technical definition of the word "do-able" , not the political one.

Since taking office Mr Osborne has repeated his desire to see £4 of spending cuts for every £1 in tax rises. With the £85bn target, that would mean £17bn in tax rises and £68bn in spending cuts. And, as it happens, Labour had already announced £18bn in tax rises. So, in theory, the tax part of the job is done. As the IFS says "that suggests that a 4:1 ratio...can be brought about without any further net increase in taxes."

But - and it is a big but - that statement doe not take account of the government's many other pledges - for example, to offset the employer piece of Labour's National Insurance rise, and raise personal tax allowances.

If they go ahead with those, they would need to find other offsetting tax rises. And the chances are that capital gains tax isn't going to be enough.

Some would also question the feasibility of cutting spending by £68bn in a single Parliament. Because other spending - on debt interest and the like - is going up, it would mean an overall cut for departments of £78bn. And, that would not be shared equally because of the departments being protected. For the unprotected departments - we're looking at cuts of £82bn by 2014-15 - meaning the average budget of these departments fall by nearly a third.

Alternatively, they could stick to the spending totals helpfully provided by the OBR - which show departmental spending falling by £39bn, or 10% over the period. That is more in the ballpark that's previously been discussed.

As I mentioned last Thursday, there's a long list of think tanks queueing up to tell the Treasury how to cut the remaining £30bn from the welfare budget. joins the list tomorrow, with more than 100 pages of its suggestions for next week's Budget and the spending review.

The IFS says that "such welfare cuts are likely to seem prohibitively large". The betting is therefore that Mr Osborne will announce a mixture of all all the "tough choices" next week: faster spending cuts (including departmental and welfare spending) and, new tax rises, with all eyes on VAT.

This may well be the best guess of what he will do. But remember that he has just announced a root and branch, fundamental re-think of what government does and how it does it, including the benefit system and the newly topical issue of public sector pensions and pay (which I'll discuss properly sometime soon).

Remember, too, that Mr Osborne and his advisers have always been much taken with the overwhelming historical evidence suggesting that raising taxes to cut large deficits can damage economic growth - whereas spending cuts do not. In fact, this same evidence suggests that cuts can even help, by supporting market and business confidence.

You may not endorse these arguments. There are those who say the research doesn't apply in this era of banking crisis and deeply fragile global demand. The point is that Mr Osborne does. And so does his team.

Given all that, it's possible that Mr Osborne really means it when he says he will do all he can to avoid an increase in VAT - and that he really does not want to prejudge the results of the spending review by saying, in effect, "You know what? We're going to avoid some of that fundamental re-thinking of middle class benefits and the like, and raise VAT instead."

If he wants to avoid that, we might only get isolated VAT rises next week - perhaps extending VAT to financial services, or other areas, to raise several billion pounds. We might also get a promise - or threat - to raise VAT, or introduce a carbon tax, on a pre-established timetable, if certain stringent targets for the deficit and/or spending are not met. That's on top of some pretty eye-watering news on pay for public sector workers and probably much else besides.

Then again, he may decide that the international clamour for deficit plans - plus the OBR report yesterday - give him enough reason to kick off this era of tough choices by raising VAT across the board. But if so, it will be interesting to see him make the case.

As expected, the (OBR) has revised down Alistair Darling's .

The central forecast for 2011 is now for 2.6% growth, not 3.25% as in the Budget - though remember that Mr Darling's borrowing numbers were tied to a more "conservative" forecast of 3%.

Also, the OBR's estimate of structural borrowing - the part of the deficit that won't go away with the recovery - has been revised up, by 0.6% of GDP in 2010-11, or around 8bn.

That is despite the fact that the overall borrowing figures have actually gone down slightly for the period. That may partly be due to the fact that the OBR is basing its estimates on a central forecast for growth, not a conservative one. Spending is expected to be slightly lower than forecast previously - and tax revenues slightly higher.

The rise in the structural deficit is due to the OBR's decision to lower its estimate of trend growth - the rate that the economy can grow long term, without causing inflation.

In the Budget, trend growth was assumed to be 2.5% from 2010 (for the purposes of the Budget). The OBR thinks it will be 2.35% until 2013, then fall back to 2.1%.

For similar reasons, the OBR has cut the estimate of the amount of spare capacity in the economy at the end of 2009 - from 4% of GDP to 2% of GDP.

This is an important change. But the increase in structural borrowing diminishes a little over time. By 2014-15, the structural deficit is expected to be only 0.3% higher than forecast in Alistair Darling's last Budget. That is the kind of time frame Mr Osborne is looking at in setting his policy next week.

Update, 10:58: Sir Alan Budd and his co-authors are discussing their report with reporters now.

Sir Alan was keen to emphasize the point I made above - that these forecasts are not deliberately conservative in the way that past Budget forecasts were.

That means that, for example, they have ditched the extremely cautious assumption about future unemployment which was - by the Treasury's own admission - painting an inflated estimate of social security spending in the future.

Other things equal, getting rid of those assumptions would have lowered overall borrowing by more than the 3-4bn or so a year we see in these forecasts from 2011-12.

The key factor operating in the other direction - again, highlighted above - is the change in trend growth.

The best way to capture that change is that previously the Treasury thought that the crisis had caused a permanent loss of output of 5.25% of GDP by 2015 - around 70bn.

Now, the OBR puts that loss at 8.75% of GDP - that's around 120bn of "lost" income for the country as a whole.

However, the OBR would dispute that all of this was "lost" as a result of the crisis. In its view, some of it was never there - it was based on an unreasonably high expectation of how fast our economy could grow at a time of great demographic change, and slower immigration. In its view, that forecasting error pre-dates the crisis.

Given the scale of that change, it is perhaps surprising that the structural deficit by 2015 has risen by only 0.3% of GDP - less than 5bn.

Once again, Sir Alan would say that's understating the difference between this forecast and Mr Darling's - because this one has all those less cautious assumptions built into it.

However, as my colleague, Paul Mason, was able to get Sir Alan to confirm, that 2015 figure means that the OBR does think that Labour's policies would have eliminated a large part of the structural deficit by the end of the next Parliament. The OBR expects it to go from 8.8% of GDP in 2009-10 to 2.8% in 2014-15.

It is safe to say that Mr Osborne will want it to fall much faster.

Give a small child a cookie. Tell him he can eat it now or get two cookies later, if he can manage to hold off. Most of them eat the cookie. But if they can wait, that turns out to be a pretty good sign that they are cut out for a career in business.

Presenting the Bottom Line this week, I talked to the guests about playing the long game. When it comes to making money, patience pays. But it's not easy.

My guests covered a wide spectrum - from gold mining in Siberia, to banking to music publishing (where my guest gave Simon Cowell his first break, making the tea).

We also talked about scouting for talent - and about Terry Leahy's decision to leave Tesco.

As usual, you can consume your Bottom Line any way you want: on Radio, TV or podcast. And I promise: it's a deficit-free zone.

I can't remember a time when a single set of economic forecasts has inspired such interest, or such dread. Let alone forecasts that expire in eight days.

However, in a summer of firsts, Monday's publication of the first report from will be one of the more important.

The document will contain baseline forecasts for economic growth, public borrowing and debt, based on the assumption of no change in government policies. It will therefore shape the terrain on which the government's Budget decisions on 22 June will be based. With those decisions, the OBR forecasts will change again.

Say, for example, that Chancellor Osborne decides he needs to eliminate the structural deficit by 2015-16. Under the new system that he has introduced, it's the OBR that's going to tell him how much he needs to cut spending or raise taxes to have a fair chance of reaching that goal. The OBR reckons the cost - the ministers get to decide how to pay it.

What can we expect? The honest answer is we don't know. But it's interesting to consider the complex trick that Sir Alan Budd - the chairman - and his colleagues have been asked to pull off.

With this one set of figures, both the government and the OBR need this new body to demonstrate its independence. That is more difficult than it sounds.

The running assumption, often repeated by the government, is that Alistair Darling and (especially) Gordon Brown forced the nice Treasury civil servants into making hugely overoptimistic forecasts. Now those same officials have been set free - and remember, it is basically the same officials writing these forecasts, though this time with guidance from Sir Alan's team - everyone seems to think the picture will be a lot worse.

If that happens, ministers will say this demonstrates the importance of taking politics out of official forecasts. But if you were being mischievous you could say it proves no such thing. After all, who gains most from a confirmation that the books were cooked under Labour than the new government? And who will benefit more than the current chancellor, if these new forecasts turn out to have been too gloomy after all? The OBR is supposed to be independent of all politicians, not just the politicians of the old regime.

So much for the politics. What about the economics?

There's been a lot of talk about next year's growth forecast being revised down. That may well happen. But that would be less of a seismic event than many seem to think.

The borrowing numbers are currently tied to a forecast of 3% growth in 2011, whereas the current average of independent forecasts is 2.2%.

Imagine the OBR decides that growth will be 2.25% in 2011. Other things equal, this would add around £7bn to the overall deficit for 2011-12. But as usual, other things aren't equal: the old forecasts for 2010-11 were also based on an expectation that the deficit this year would be £167bn. In the event, it was £156bn.

The OBR will have to decide how much of that good news was structural - and how much was a one-off (for example, higher revenues due to high earners bringing forward income to avoid the new 50p rate). No-one can know for sure, even inside the Treasury. But, for what it's worth, the experts I've spoken to reckon that at least half of that £11bn improvement is permanent.

That would mean it more or less cancelled out the impact of lower growth next year, leaving the headline borrowing numbers not much changed - and, crucially, the structural deficit somewhat lower.

If that is what happens, that would seem to back up what some Treasury officials have said privately all along (see my previous post Gotcha); that they had "Gordon-proofed" the borrowing numbers, by assuming that the higher 2009 forecast they were prodded into would make a smaller than usual contribution to cutting the deficit. Remember - the March 2009 estimate of the deficit for 2009-10 was £175bn.

However, that is only talking about 2010 and 2011. The growth forecast for 2012 onwards could also be revised down from 3.25% a year, meaning that the overall borrowing numbers are higher, even if the structural deficit is unchanged.

In theory, that needn't concern the chancellor since he's focused on the structural deficit. But he might conclude, given his concern about the financial markets' appetite for large deficits, that structural borrowing needed to come down quicker than before.

But there are two much more important numbers, which could make the OBR report a 'game-changer' after all. The first is the estimate for the UK's long-term potential growth rate - now 2.5%. The second is the estimate of the permanent loss of output due to the financial crisis - which the Darling Treasury reckoned to be 5.25%.

It's quite possible to be gloomier, on both counts. With an ageing population, and lower immigration, you might agree with the OECD that our potential growth is closer to 1.75% a year. You might also say the permanent loss to output was more like 7.5%.

As it happens, that was what economists at Barclays Wealth thought when they collaborated at with the IFS on its Green Budget earlier this year. On that basis, they forecast then that the structural deficit in 2015-16 would be £53bn higher than the forecast in the PBR - ie that the overall "hole" to fill wasn't around £70bn, but nearly £125bn.

As we've seen, the borrowing numbers have got better since then: but with these different assumptions, you'd still be looking at spending cuts or tax rises worth around £110bn to fill the hole, not the roughly £70bn that figured in the election.

That would be a radical change from the estimates that these same officials produced (albeit with some help from Mr Darling) just three months ago. I'd be surprised to see it on Monday. But it's quite plausible that Sir Alan will leave the permanent loss of output unchanged, yet revise down the estimate of trend growth to 2.25% a year.

Even allowing for the recent improvement in revenues, that could leave the forecast for structural borrowing in 2015-16 some £20-30bn higher than in the last Budget. That would be bad news, but - by recent standards - not quite a cataclysm.

Sir Alan Budd is a distinguished public servant: I am confident that he is, first and foremost, seeking the truth. But the prime minister has rather prejudged the OBR's conclusions by asserting, without offering a lot of evidence, that the public finances are much worse than we had thought.

If Sir Alan only wanted to demonstrate his independence on Monday, he would surely be tempted to stand up and say Alistair Darling's forecasts were spot on. I suspect that is not what is going to happen. But his conclusions may be less dire than many predict.

What do we cut - and who would it hit? When the comprehensive spending review starts in earnest in a few weeks' time, those two questions are going to be right at the centre of public debate.

The Budget on 22 June will set the scale of the challenge: the amount by which spending needs to be cut. The review has to decide the what - and the who.

Ministers have already made it pretty clear that benefits and tax credits are in the frame for cuts. As they keep reminding us - every penny saved from these is a penny that does not have to taken away from front-line services. It seems clear to me that child benefit for the middle and upper classes is not long for this world.

The Conservatives' promise to protect it was always shaky: yes, David Cameron promised to protect it in one speech, at the party conference last year. But - as I pointed out at the time - it was not in the party's manifesto. By and large, he and other ministers would "forget" to mention it in the litany of benefits that they would keep. It was left to advisers to assure us, off camera and "on background" that the benefit would indeed be kept.

What better time, then, to have some basic facts about what our £200bn benefit system actually does - and who actually receives the cash. The ONS has just released a treasure trove of data on this, in .

The facts show that income inequality, after tax, was roughly the same in 2008-9 as it was 10 years earlier. You might see this as an indictment of Labour policy - but inequality would have risen without Labour's increases in benefits and tax credits. It inherited a very redistributive - or progressive - system, and then made it more so: before taxes and benefits, the top fifth of household earned £73,800 a year in 2008-9, fifteen times more than the poorest fifth, who earned, on average just £5,000. After taxes and benefits, the richest earn only four times more than the poorest, on average: net earnings at the top fall to £53,900, whereas the income of the bottom fifth goes up to £13,600.

Interestingly, the system is even more redistributive when it comes to retired people, and has become more so in recent years. For those households, income in the top fifth starts off 16 times higher than the bottom fifth. After taxes and benefits, the ratio falls to just three to one.

If that was all you knew about the benefit system, you'd think that cutting benefits would be a disaster for the poor. But here's the really interesting fact from the ONS document: the poorest 40% of the population only receive just over half - 56% - of the cash benefits paid out in a given year. Put it another way, nearly half of all cash benefits go to households that are not poor in income terms.

Though they may not believe it, the "middle classes" do pretty well: for households in the middle fifth of the income distribution, 20% of their net income came from cash benefits in 2008-9. Even for families in the quintile just above them - that is, in between the middle and the top fifth of households - nearly 10% of net income came from benefits.

On the basis of ONS figures, the think tank has previously calculated that the government spends more than £30bn a year on benefits for middle-class households. They define middle class as an income of more than £15,000 a year for every adult, and £5000 per child - or £40,000 for a couple with two kids, in 2007-8 money.

Now those benefits include state pensions: indeed, that's one reason why the system has a bigger effect on retired people. But, as the Social Market Foundation points out in a timely report out tomorrow, they also include other universal benefits which, in the context of a "fundamental" review of government's priorities, stick out like a sore thumb.

The Conservatives and the Liberal Democrats have already stuck their toes in the water when it comes to taking away tax credits from the better off. But you have to assume that the spending review will prod them to go much further.

There are nine questions which any public spending programme will supposedly have to answer; for those who want to read the list it's on page eight of the . The key ones are "Is this activity essential to meet government priorities?; "does the activity provide substantial economic value?"; and "can the activity be targeted to those most in need".

When it comes to child benefit, the SMF and many other think tanks say that the answers are, respectively: "no", "no", and "yes." Means-testing child benefits and removing the family element of the child tax credit from all households in the upper half of the income distribution would save just over £6bn a year - the same amount that departments are laboriously finding in cuts this year.

The SMF also wants to make only the basic winter fuel payment to over-60s - now £200 a year - universal, and means-test the higher payment of £300, which now goes to everyone over 80. That would save £1.3bn a year. To further stick the boot in for pensioners, they also want to freeze their - higher - personal income tax allowance for five years. That would save £1bn. It would not be popular, but it's worth noting that their allowance is already very close to the coalition's professed goal, for everyone, of £10,000 a year.

The think tank also wants the government to remove the VAT exemption from magazines, books and newspapers, which now costs the Treasury £1.5bn a year - on the grounds that the vast majority of the money goes to families in the top half of households. But, as a share of their income, poorer households spend more than richer ones on these products. And newspapers are already having a hard time competing with the web. I'm sure Mr Osborne is thinking about doing this, but he may well decide that the extra £1.5bn in revenues is not worth aggravating all of Fleet Street.

I'll have more to say about VAT in a few days. All I would say now is that I think it's inconceivable - both from a political standpoint and an economic one - that the government would raise the standard rate of VAT substantially but leave child benefit and other pillars of "middle-class welfare" untouched.

Happily for the government, the bad news keeps flooding in.

First, the G20 decides that cutting deficits is now priority number one.

Then David Cameron pulls , declaring himself "shocked, shocked" to find that the British government had been running a massive deficit. (And it's going to have to pay loads of interest on it - who knew?)

Now we have a , reminding the world that fixing the UK public finances will be a "formidable task".

It all makes for the perfect run-up to George Osborne's statement on the comprehensive spending review this afternoon - not to mention his hair-shirt Budget in two weeks' time.

Before the election, the chancellor set "eight benchmarks" by which a Conservative government's economic policies ought to be judged, of which the most concrete was keeping the UK's triple-A credit rating.

A few weeks ago, Fitch downgraded the Spanish government's credit rating - from AAA to AA+. Spain has problems the UK doesn't: it has a bigger current-account deficit than the UK, and it's in the single currency so it can't easily adjust.

But its government made some of the same mistakes as the UK's in the lead-up to the crisis, and its public finances are in a similar state.

This latest Fitch Report makes clear that it would think hard about downgrading the UK, too, if the coalition stuck with the old government's timetable for cutting the deficit.

As I've noted before, the maturity of Britain's debt - and the Treasury's past record of bringing down deficits - give the UK leeway with the ratings agencies that Spain and others do not enjoy. Quite apart from the flexibility provided by not being in the euro.

But even with all that, Britain's vital fiscal statistics do stand out from the rest. A year ago, the goal of halving the deficit over five years looked unambitious, but just about respectable.

However, since the start of this year, nearly all of the major European economies have accelerated their plans to cut borrowing; Germany announced another round of consolidation only yesterday. That has put the UK out of step. In polite company, it is no longer respectable to say you expect to still have a deficit of 4% of GDP in 2015.

Of course, there's a reason why the UK's deficit ends up higher than the others' - it starts off a lot higher. In fact, the primary deficit - that is, the gap between spending and revenues, before taking account of the cost of servicing the debt - is a whopping 9.3% of GDP.

That's larger than any other triple AAA-rated country. Spain's is slightly higher - 9.4% of GDP. But that is one reason why it is no longer AAA.

In effect, the Fitch report says that the June Budget needs to promise to bring the deficit down a fair bit faster to be sure to keep hold of Britain's triple-A rating.

There are caveats: we know, for example, that if the Office for Budget Responsibility produces a much a starker view of Britain's long-term potential growth rates, this could massively increase the structural hole that the government needs to fill.

If so, the ratings agencies might accept that there's a limit to how quickly borrowing can come down. But even here, the lesson of the report is that there would be clear risks to the UK of standing so far outside the pack.

All of which - I need hardly say - will be music to George Osborne's ears.

Some would say the Fitch report painted an overly gloomy of Britain's fiscal future. True, the old budget forecasts for future economic growth look rosy. But to temper the optimism of politicians, Treasury officials also built into the forecasts a pessimistic view of how much of today's borrowing is structural and how much is cyclical.

Even if growth disappoints, it is quite possible that borrowing will fall more quickly, for each percentage point of growth, than the Treasury now expects, just as it rose a lot more than the Treasury expected in the crunch.

After all, borrowing came in lower than forecast in 2009-10, even though the economy shrank by a lot more than expected.

That would be good news. But we won't know the truth for several years. And, once again, any improvement in the borrowing picture could still be dwarfed by the effect of reducing the estimated long-term potential growth rate.

The previous government said the UK could continue to grow 2.5% a year - but many independent economists would disagree. Especially if we can expect immigration to play a smaller role in supporting growth than it has in the recent past.

That is another piece of bad news we can probably expect from the Office for Budget Responsibility when in reports in the next week or so.

There are times in politics when all bad news is good news. For Britain's first post-war coalition government - this is definitely one of those times.

The world has moved - and it has moved in this government's direction. That was the message of , and it felt like sweet vindication for George Osborne. Ever since Mr Osborne opposed fiscal stimulus in the autumn of 2008, Gordon Brown had said that the international community was on their side - and the Conservatives were "in a minority of one". Not any more.

Truth be told, big new stimulus programmes have been off the agenda - almost everywhere - for quite a while. But as recently as April, these same men and women were talking about the need for most governments to sustain the support for the economy that they already had in place. But the statement agreed in Busan on Saturday focuses on the importance of "sustainable public finances" - and the need for countries to take "credible, growth-friendly measures" to achieve that.

The US and the IMF pushed hard for that reference to "growth-friendly". Both are worried about the real economic impact of everyone slashing their deficits in 2011. , apparently investors are worried too.

But that was not George Osborne's primary concern as he flew back home. His main concern is, understandably, the tough decisions that he and the government have to make over the next few months - and how to sell them to an electorate that were not given much to go on, on this subject, during the election.

Seen in that context, the G20 statement was extremely helpful - especially the sentence welcoming "recent announcements by some countries to reduce their deficits in 2010 and strengthen their fiscal institutions". In case you were wondering: that last bit means us.

The prime minister has just given us a flavour of what's to come - we'll have more tomorrow from Mr Osborne and Danny Alexander. What we know already is that this is going to look very different from the closed, Treasury-driven exercises to cut spending that we've seen in the past. As David Cameron said in answering questions - that shouldn't be a surprise. We haven't had an 11% of deficit before, either.

There'll be no more numbers this week. Today and tomorrow are all about process - the Canadian-style "star chamber" to decide on cuts, the structured public debate - on and offline, and the effort to involve as many people as possible in these tough decisions.

Experience elsewhere - not just in Canada but in Sweden and Ireland as well - shows that this is really the only way to do this. You never know, in some areas it could produce some bright ideas for cuts that actually make parts of our public services work better for people than they did before. (See my post "Efficiency swipes".)

But before we get too carried away - consider the the larger, global lesson, of the G20 meeting this weekend. Those ministers haven't stopped talking about fiscal stimulus because the global economy doesn't need it any more. In fact, as US Treasury Secretary Tim Geithner stressed in his remarks, the private-sector recovery in many countries still seems quite fragile - witness the recent figures out of the US.

No, They've stopped talking about stimulus because they don't think the global economy can afford it any more.

Rightly or wrongly, most in the G20 have drawn the lesson from recent bond market ructions in the eurozone that governments, as a group, need to cut borrowing faster than planned over the next few years. That's almost regardless of what happens to growth, although, naturally, the G20 expect the world's central banks to do their part to support the recovery. As I've indicated, the US doesn't quite agree, but given its own deficit numbers. Mr Geithner wasn't in a position to make much of a fuss about it this weekend - at least not in public.

So yes, the message of the G20 was that the world was moving the government's way. But the message was also that the finance ministers of the world's most important economies think that fiscal efforts to support the global economy - in effect - have now reached a dead end.

Given the the enormous weight of public and private debt weighing down on the world's countries, that may be an accurate statement of where we are. But it is a sobering thought for a country - and a government - which will need to rely more than most on strong growth beyond our shores.