Hugo Radice: The realities behind Darling's Budget, and a clash over markets and the state

These days, there is little drama: anything not already signalled in the autumn Pre-Budget Report is almost invariably leaked in advance, and the commentators' responses can be written well before the Chancellor stands up.

Last week's Budget was even more predictable, since the political parties had long ago taken up their positions ready for the fight. The financial markets scarcely moved, and, in any case, were preoccupied with the Greek deficit and the attempts of the Eurozone countries to resolve it.

In subsequent debates at Westminster and in the media, the main preoccupation remains the level of the Government deficit, and the future course of the accumulated debt. Since last year's Budget, the arguments between those advocating faster cuts and their Keynesian critics defending the Government's present course have been endlessly repeated. This reflects not only different views on how our economic system works, but also and more importantly, a profound political disagreement on the balance between markets and the state.

There has been some discernible movement in opinion over recent months, with the advocates of faster cuts in the deficit losing ground to their Keynesian critics. Some influential commentators have broadly supported the government's "steady as she goes" approach, as has the International Monetary Fund. While the deficit hawks have continued to warn of impending doom, the continued success of the Treasury in selling government debt suggests that they are seen as having cried wolf too often. Much was made by the hawks of a European Union report that criticised the British government for not having clear plans to reduce the deficit, but the report made exactly the same criticism of France and Germany.

The key argument against rapid cuts is that they are not actually necessary at this point. Heavily indebted households and businesses in Britain are firmly committed to reducing their own debts, so our savings are increasingly available to the Government. Globally, as the recovery slowly gathers pace, the glut of savings which fuelled speculative financial investments in the run-up to the crash is being directed to safer havens, and foremost among these are the treasuries of the richer countries, including the UK.

Perhaps the real reason for the continued scare-mongering is that powerful financial interests remain scared that serious measures will be taken to bring them under greater public surveillance and control. The dramatic recovery in bank profits, the source of those widely-reviled bonuses, has been fuelled by decreasing competition in both retail and investment banking.

The giant US investment bank Goldman Sachs and the UK-based Barclays Capital have done especially well out of the crisis, snapping up the remains of their fallen rivals at bargain prices. The last thing they want is effective competition eating into their profits. But given the huge costs facing any private investors seeking to enter the banking market, only determined action by governments can bring this about. Hence the relentless attacks on the competence of governments, and on their fiscal capacity for action.

For most citizens, of course, the most important consequence of any Budget is its effect on their own economic well-being. In this regard, Chancellor Darling has seriously upset cider drinkers, but otherwise provided most of us with a low-key mix of minor changes. Despite the attempt in some quarters to paint the tax changes as an attack on the middle classes, it is only the seriously rich who will be affected. The new 50 per cent tax rate only hits income over 150,000, while few will be concerned by higher stamp duty on houses sold for more than 1m. Leaving the inheritance tax threshold unchanged means that inflation will bring some estates over the threshold, but at present only about three per cent of estates pay any duty at all.

There remain two very important areas of uncertainty. By far the most important determinant of the future course of our public finances will be the pace and continuity of the economic recovery. This in turn, given our highly open economy, depends on what happens to the world economy as a whole. The so-called emerging economies, especially the two giants China and India, have continued to grow through the crisis and are once more picking up speed.

Given the importance of our exports to the rest of Europe – over half the total – we have every reason to hope that recovery in the Eurozone countries will not be slowed by Germany's reluctance to import, and to help weaker countries like Greece to manage their public finances.

The second area concerns global measures to improve financial regulation. Possible steps to reduce systemic risk in financial markets include higher reserve requirements for banks, the separation of investment banking from low-risk retail banking, the closure of tax havens and taxes on speculative transactions. However, co-ordinated action through the Group of 20 and the major global institutions requires decisive leadership, and for that we are bound to look to the USA.

The dollar remains by far the dominant currency in international trade and finance, and in global investment banking the US banks are the biggest players.

President Barack Obama's administration has made many proposals, but these have to be agreed by a Congress deeply divided over healthcare reform, and focused mainly on the mid-term elections later this year. But if concerted action is not taken soon, we could be back to business as usual, and the risk of further crashes.