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There's so much we don't know about the - the potential economic impact is just one of them.

Many in the markets and elsewhere are now trying to estimate what the eventual economic cost of the outbreak might be. It's safe to say that none of them has a clue.

The scary starting point for these calculations is a study by the World Bank last year, which suggested that another truly global flu epidemic would end up costing nearly 5% of world GDP - or more than $3 trillion.

That's assuming a pandemic on the scale of the 1918 "Spanish Flu" outbreak, which infected around one third of the world's population and killed 50 million. Helpfully, the report concludes that a hit of this magnitude would throw the world into a depression.

Of course, that could happen. But experts who know more about viruses than I do (not a small list*) are still suggesting that the chances of such a catastrophe are small. We do have anti-viral drugs now that weren't available. And, they tell me, some version of flu already infects tens of millions of people a year, killing at least half a million of them, without leading to a pandemic on that scale.

What about the more recent, and less alarming, example of Severe Acute Respiratory Syndrome (Sars) in China and Hong Kong? That killed more than 700 people in 2003, and (according to the Asia Development Bank) cost the region between $18bn and $60bn in lost output - or 0.5-2.0% of regional GDP.

Many say it will be less this time, because the world is better prepared. And this virus seems a bit easier to treat. I'll leave that to others to judge.

But as Julian Jessop, chief international economist at Capital Economics, points out, even in the Sars case the costs turned out to much less than initially feared. If you look at the retail sales data in China it's a blip, but nothing more than that. A lot of the initial fall was made up later, when people made the purchases that they had previously put off.

Ill-informed optimism is no better than ill-informed gloom. But if we are looking at something on the scale of the Sars issue now, my guess is that the same will be true this time. The costs will be less than some now fear.

Some have said that the impact will be greater, because the global economy is already in such a fragile state. At first glance that seems sensible - you could say that our global economic immune system is in a weak state to shrug this illness off.

But I suspect the opposite is true, that the economic costs of this virus might actually be less than it would otherwise have been, because some of the output that might have been lost to flu has already been lost to the recession.

To put it bluntly, if unemployed people are forced to stay at home for a few weeks, that has a smaller economic cost than if they were all in work. And if people are already going out less to restaurants, cinemas and the like, the fall in consumption due to flu may be smaller than it would have been as well.

Of course, you can't push this argument too far - any pandemic that killed millions of the working age population would have an enormous long-term impact on our potential output, regardless of whether they happened to be out of work when they died.

I fear this blog is turning into a parody of economic analysis at times like this, as I debate the finer economic points of a potential humanitarian catastrophe. But after all, this is a blog about economics.

Assuming that this is more a Sars style outbreak, with widespread but short-term disruption to normal economic activity rather than millions of deaths, it is possible that the impact - in the midst of recession - will be less visible than it would have been a few years ago.

But don't get me wrong, with the global economy as weak as it is, it would be far, far better not to be facing this threat at all.

* as evidenced by an earlier version of this post, which wrongly specified a particular version of the flu. Apologies.

For anyone who has spent the past two weeks thinking about Britain's finances, here's one big thing what happened while you were away: people got a lot more optimistic about the Chinese economy.

I had a good chat with Jim O'Neill, Goldman Sachs' chief economist yesterday. He could scarcely contain himself on the subject.

The Chinese authorities have impressed the world before with their response to economic crises - for example during the Asian financial crises of 1997-8. This crisis is of a different order. But so has been the response.

As a share of the US economy, China's fiscal stimulus measures this year are larger even than America's. While the loosening of credit conditions is greater than any that O'Neill has ever seen.

All this policy seems to be having an effect. He's just raised Goldman Sachs' forecast for Chinese growth this year from 6% to more than 8%, and next year's from 9% growth to nearly 11%.

This optimism gets support from stories on the ground. Qu Hongbin and Sun Junwei, of HSBC, just returned from a tour of three big cities in inland provinces, which were never as dependent on exports as the coast.

They say that firms there are already benefiting from all the new infrastructure projects that the government is putting on stream. And consumer spending is holding up as well, growing at annual rates of close to 20%.

The national picture is also looking up. The volume of bank loans grew by nearly 30% in the first three months of the year. While the British were obsessing over their finances, China also reported a record month for car sales in March.

Before the G20 I said that the Chinese central bank governor, Zhou Xiaochuan, deserved credit for highlighting the crucial importance of more balanced global growth coming out of this crisis. But then, as now, the big question was whether the Chinese authorities were willing to follow that thought to its logical conclusion - that China itself would need to change, since one of the biggest imbalances in the pre-crisis system was China's surplus with the West.

Is the domestic demand-led growth we may see from China this year a sign of things to come? Possibly. None other than Dr Doom himself, Nouriel Roubini, recently returned from China saying that the authorities recognised the need for change.

But there is plenty of room for doubt. The government may have put on the domestic spending taps to avoid recession this year (and we should all be very grateful that they have). But when global demand for toys and everything else eventually picks up, there will still be plenty of Chinese firms eager to meet it.

More important, without further reforms, the Chinese economy that comes out of this crisis will still be hard-wired to save a ridiculously high share of its national income.

Thanks to a distorted financial system, firms - especially small ones - will still save a lot more of their profits than they do in other countries. And the sparse-to-nonexistent social welfare system will still mean that families save every penny they can, not just for retirement but for health and education expenses and to insure against the risk of being laid off. As Dr Roubini's own points out, only 10% of the $600bn Chinese stimulus package this year is allocated to social welfare spending.

Even with reform, China would probably be a high saving economy. But it could save a lot less than it does. The excess means that it inevitably ends up with more than it can possibly invest at home. As I've discussed many times before, this export of Chinese savings is the flipside of its massive exports of goods.

No-one expects that imbalance to go away as a result of the authorities' efforts to date. Indeed, the IMF thinks that China's current account surplus will actually go up again this year, to nearly $500bn, though that's a smaller rise than in past years.

In short, it is very good news that China's economy seems to be picking up. But it's too soon to judge whether it will manage the long-term turnaround the global economy dearly needs.

confirm that this recession is already on a par with the downturn of the early 1980s, and quite possibly worse. Taken alongside the bad news on the public finances , this may go down as the week that defined Britain's political and economic choices for at least a decade.

Take the GDP numbers first. If this preliminary estimate is right, then the economy was 4.1% smaller at the end of March than it was 12 months earlier. That is worse than anything that happened in the early 1990s recession and equals the decline in the last quarter of 1980.

But the pace of the downturn - 3.5% down in the past six months alone - is actually worse than any equivalent period in the early 1980s. In fact, we haven't seen a decline this rapid since comparable records began in 1955, and probably not since the Great Depression.

This is a preliminary estimate, at an unusually difficult time. The estimates for growth in the production sector are based on data covering just the first two months of the year, and the basis for the service sector estimate is even patchier.

We know that several surveys in the past month or so have suggested that the pace of decline is slowing down. If that is true, this early estimate could be revised up, and the first quarter could mark the worst of the recession, as the CBI and others suggest.

But even if that were the case, we could still have many months of declining GDP to go. And there is nothing to stop the pace of the downturn from speeding back up.

The economy shrank by just 0.3% in the third quarter of 1980, after a 2.6% decline over the previous six months. Everyone thought that the worst was over, and it was. But the economy still shrank by another 1.7% in the two quarters after that.

To state the obvious, these figures make the government's forecast of negative growth of 3.5% in 2009 look very difficult to achieve. The borrowing figures already look set to be revised upwards yet again.

But here's the funny thing - as the nation's economic options have shrunk this week, our political landscape seems to have opened up.

Call it "reversion to the extreme". When the economy was booming, it was common to point out how small the differences between the main parties had become.

The realm of the economically possible during that period now looks positively luxurious: our debt level was fairly low, and stable, and tax revenues were pouring in. But back then, the room for manoeuvre from a political standpoint was perceived to be very small.

Take . On the economy, the great dividing line between the parties back then came down to a difference in spending plans of just £12bn. Yes, you did read that right. The Conservatives planned to increase public spending by £12bn less than Labour over the three years after the election, whereas the Liberal Democrats planned to spend about £12bn more.

That seemed a small number even then. In the week when this year's borrowing figure alone was revised up by £57bn, it sounds like an elaborate practical joke.

There are now no good economic options available to a British chancellor. Indeed, with borrowing at this level, there aren't many options at all. Yet listen to the politicians and you would think the opposite.

Suddenly, Labour seems to think it can win support by taxing the rich, after more than 15 years when it was convinced that any such talk would scare voters away.

Likewise, the Conservatives, privately at least, think that the sense of crisis is such that they will be able to pose hard spending choices to the electorate which would have been unthinkable even one year ago.

There's a lot of this story still to play out, on the economy, the budget and everything else. But already the political economy of Britain has been turned on its head.

A Budget of rose-tinted realism is my view of the chancellor's efforts on Day Two.

Optimistic the Treasury certainly is - about the economy, about the appetite for government debt, and about much else besides. But on the scale - and permanence - of the hole in the public finances, this Budget is quite steely-eyed.

In my previews of the Budget (see and ), I flagged up that the OECD and others believed that a lot of this year's budget deficit was structural, and couldn't be expected to go away as the economy recovered. It turns out that things are worse than the OECD - or anyone else - thought.

The Treasury now thinks that the structural deficit will be 9.8% of GDP this year - out of an overall deficit of 12.4% of GDP. Almost all of that has appeared in the last two years: the Treasury claims the structural deficit was a mere 2.7% of GDP as recently as 2007-8.

As , dividing the deficit into "structural" and "cyclical" portions is heroic guesswork at the best of times. When the numbers are this large, and when they change so radically from year to year, you start wondering whether there's much point in maintaining the distinction at all.

For all of us, the key point is that the public finances are going to be in dire shape for nearly a decade, even if all of the chancellor's economic forecasts come true. The pain which follows from that basic truth was spelled out more clearly by the experts at the .

As they point out, if you add yesterday's budget squeeze to the measures announced last November, the government is now planning to tighten the budget by well over 6.4% of GDP by 2017-18 - or £90bn a year in today's money. Whether through lower spending or higher taxes, that translates into £2,840 a year for every family in the UK.

Looking at the components of that squeeze, the IFS analysis shows that the chancellor has left a lot of the hard work undone, although since it applies to the parliament after the next one, you can see why he might not have thought it was worth his time.

According to the IFS, the tax rises already announced would only raise about £300 per family per year, slashing public investment will net £400 per family per year, the squeeze in spending would raise about £700 per family a year.

The Budget Book shows that more than half of the total squeeze pencilled in by 2017-8 will be achieved through unspecified tax rises or cuts in current spending. All we know is that it won't be through cuts in public investment - there won't be much of that left after annual cuts of more than 17% a year between 2012-14.

I mentioned yesterday that the spending plans would certainly mean real cuts, given the rising cost of servicing the national debt and rising expenditure on social security and other things the government can't do much about.

Once the government has paid those bills, the IFS expert Gemma Tetlow says, the new plans suggest that departmental spending will have to fall by 2.3% a year in real terms - the tightest outcome for spending over a sustained period since at least the late 1970s, probably earlier. As she points out, if you applied those cuts across the board to existing expenditure plans, only the Department for International Development would emerge with real growth in resources over that period.

I wonder whether the cross-party consensus on expanding foreign aid can possibly survive the onslaught ahead.

Wednesday 1830: Hmm. I talked about the importance of fine print, then neglected to read some of it myself until now.

In very tiny letters below , it says that the higher taxes on high earners will net a lot more in 2011-12 than they will in the first two years highlighted in the tables. All told, those steps will actually raise about £7bn from 2012-3 onwards, which is not small change - the pension change alone will bring in an extra £3bn when it is fully phased in. That changes the story somewhat.

But, the big question continues to be whether these forecasts are plausible. Remember, the IFS thought it quite likely that the government wouldn't raise anything at all from the new 45p rate. Diminishing returns could be even more of a problem at 50%. True, one of the ways people would have avoided paying the 45p rate was by putting their earnings in their pension instead - and that avenue has now been closed off. But we still need to ask whether the government is taking account of the likely decline in VAT revenues and the like from people having less available to spend, and the disincentive effects which a 50% rate might bring. All of that would reduce the overall impact on the budget.

Most important, it is still true that more of the tightening is being achieved through cuts in investment and spending on public services.

Of the £26.5bn cut in borrowing by 2015-16, £9bn will be achieved by cutting net public investment. Even if the tax take rises to £9bn by then, that would still mean that two thirds of the cut in borrowing over the next few years is being achieved through lower spending and investment in things that voters want.

The conflict I flagged up earlier between rhetoric and reality has been borne out. The chancellor talked big about raising taxes, but if you look at the tightening in the budget he is planning from 2011, more of the work is being done by slower spending growth than by higher taxes.

Even within the higher taxes, it's striking that he's planning to raise almost as much from higher fuel duty than through the higher taxes on the rich. The end of personal allowances for people earning more than £100k will raise a mere £180m by 2011-2.

Compare that to the extra £1.75bn the government will be netting in extra fuel duty. Similarly, restricting the tax relief on pension contributions to 20% for people on more than £150k will deliver a measly £200m a year.

The 50% top rate for people on more than £150k will raise somewhat more - about £1.8bn in 2011-12, but as I said earlier, the IFS and others have been sceptical about the capacity to raise even that.

And of course there's a reason for the smoke and mirrors - which is that you can't raise the kind of money this government needs to raise by soaking the rich. There aren't enough of them, and those that do exist tend to be very good at keeping the government's hands off their cash. Taxing the rich makes for good politics but less effective economics.

We don't have all the numbers yet, but two key messages from today's Budget. One is that the chancellor is betting on a very rapid bounce-back of the economy to make his numbers add up.

It's quite common to have rapid growth after a recession - in that sense 3.5% from 2011 onwards is possible. But this isn't a typical recession. All the evidence is that recoveries are much weaker after recessions that start with a financial crisis, and this will be after, arguably, the greatest financial crisis we have ever seen.

The other, political, message is that he is going to balance the books on the backs of the rich if he gets half a chance. We haven't got the Red Book yet with all the details, but my guess is that the Budget tightening of 0.8% a year from 2010 will put him in the right ballpark for stabilising the debt ratio by 2015-16 - although at a whopping 79%, compared to the 57% peak in 2013-14 forecast in November.

The speech gives the impression that he's going to raise most of this from the rich - something which the Institute of Fiscal Studies earlier this week said could be very hard to achieve.

But more than usual, the fine print matters. Last November he talked big about tax rises on the rich, but the bulk of the tightening he announced was actually raised through slower growth in spending, which affects everyone, perhaps most of all the poor. We still don't know what that balance will turn out to be. It's not a soak-the-rich Budget until we see the numbers, but it certainly sounds like that from here.

Two dates and a figure will tell us most of what we need to know about today's Budget.

The first key date will be when the chancellor expects the economy to return to positive growth. In November he was hoping for the summer. Now it is likely to be early next year - but the timing will be important. The latest consensus forecast is for modest growth in 2010 of 0.3% - but that consensus is falling fast. If the chancellor comes in below that, or even with negative growth for next year, he will be able to say he is being cautious.

A slower return to growth will spell bad news for the borrowing forecasts. We learned this morning that net borrowing for the 2008-9 financial year was £90bn - a little less than experts such as the Institute for Fiscal Studies had been predicting but still £12bn higher than forecast in the last November. The figure for this year and 2010 will be higher still - at least £160bn.

Growth deferred means debt piled up. As we know, that purely "cyclical" borrowing is not the chancellor's biggest problem, because most of it should go away by itself as the economy recovers (though it does raise the long-term cost of servicing the public debt).

But if the economy is going to return to trend later than forecast, that will at least mean that he can push forward the date at which he expects to get the debt ratio under control.

That is the second date to watch for. In November Alistair Darling said he would stabilise debt and balance the current budget (excluding investment) when all of the global shocks of the past two years had worked their way through the economy. Back then he thought that would be 2015-16.

Look to see how far he pushes that date forward today - and remember that the further away it gets, the further it will be going into not the next Parliament, but the Parliament after that.

And finally, that figure I'll be looking for? Of course there will be plenty to choose from - for example, the level at which debt is expected to peak as a share of GDP, which the chancellor reckoned would be just over 57% in November. I would be surprised if he doesn't raise that by at least 10 percentage points today, probably more.

But the number I'm going to single out is the forecast real growth in total spending from 2011-2016. In the PBR he was looking at average real terms growth of 1.1% a year during that period. Will that turn into a real freeze in spending, which would undoubtedly mean real terms cuts in spending for services that people care about? We'll have to wait and see.

It is possible he will keep that figure unchanged - after all, why make things any easier for the Conservatives than you need to? But he will need a fairly convincing story to tell the markets if he does, inevitably involving tax rises. All will be revealed at 12.30 today.

Britain doesn't have to worry about inflation right now, but the risk of deflation seems a lot smaller than it is elsewhere. That's my tentative conclusion from .

You might think that a little odd. After all, isn't this the day that the RPI measure of inflation turned negative for the first time in nearly 50 years? But we had been expecting that for some time. With the dramatic fall in energy prices and mortgage rates, it would have been downright bizarre if the RPI had not plunged.

The surprising thing about the March data is the modest decline in the narrower, CPI measure of inflation. Though it fell back from last month, it is still well above target at 2.9% and has now fallen less than anticipated for several months.

Also, this latest fall in CPI was entirely due to falling food and energy prices. The core measure (excluding those items) actually rose a little in March, from 1.6% to 1.7%.

To repeat, I don't think inflation is on the rise. Nor do I think the Bank of England should stop worrying about deflation. Inflation is still likely to fall sharply over the next year. But looking around the world, you would have to say that a prolonged period of deflation seems less likely in the UK than it is elsewhere.

That is certainly the implication of a little noticed chart in the OECD's recently [page 60 of pdf]. It shows the organisation's forecasts for GDP deflators - which you can think of as the broadest measure of price pressures for the whole economy.

Across the largest economies it expects this measure of inflation to rise just 0.3% in 2010 - the year when deflationary pressures are expected to be most intense - with prices rising by 0.5% and 0.6% respectively in the US and the Eurozone, and falling 1% in Japan.

The outlier, by a wide margin, is the UK, where it expects prices to rise by 1.6% in 2010. The forecasts for the CPI measure are broadly similar, with once again the UK showing much higher inflation than other countries.

Of course, the fall in the pound plays a large part in this prediction - none of the other major economies have seen their currencies depreciate so rapidly in such a short time. Indeed, many have seen their currencies go up.

In the case of the Eurozone that is increasing the risk of deflation, something which the ECB will have to acknowledge next month when it meets to decide whether to adopt some form of quantitative easing.

(As a side note, it's interesting to note that the free-rider problem works in reverse when it comes to monetary policy. The country that doesn't engage in fiscal stimulus, when everyone else is, can free-ride on their efforts, because some of that stimulus will leak overseas. But if you are the only economy not engaged in quantitative easing, you suffer even more, because investors will come to you looking for higher real returns, pushing up the exchange rate and hurting exporters. That is what is happening to the Euro.)

But to return to the main point, if you thought that the UK authorities' greatest task this year was preventing deflation, the OECD seems to think they are going to win - and do so with a greater margin for comfort than either the US or the Eurozone. It will be interesting to see tomorrow whether the IMF takes the same view in its new global forecasts.

To reiterate, none of this means that the Bank of England needs to change tack. We're a long way from that yet - indeed, QE has yet to show much of an effect. But having adopted quantitative easing sooner than others, the data suggests that it might need an exit strategy before everyone else as well.

Compared to the fears of prolonged deflation, the risk of above-target inflation would be a nice problem to have. But given the 18 month to two year time lags involved in monetary policy, the OECD data suggest the Bank could be having that conversation as early as next year.

As you'll have gathered, I have been taking an Easter break. I'll resume blogging presently; in the meantime, you can read over at the .

Economics is a twisty-turny game at the best of times, but the clash of short- and long-term policy right now can seriously mess with your head.

Take the Bank of England. It is now one third of the way through a plan to inject £75bn into the economy over three months. The number one goal of this policy is to raise inflation over the next year or two, by increasing the amount of money in the economy and reducing long-term interest rates, notably the interest rate on government bonds. The Bank wants to do this because it fears that it will otherwise undershoot its target or even face a prolonged period of deflation.

For this policy to work, the markets have to believe that the Bank will stick with it. The expectations element explains why gilt yields (the interest rate on government bonds) fell sharply when the policy was announced - even before any bonds had been bought. It also partly explains why yields went up again recently, after the Bank's governor, Mervyn King, suggested that the Bank might not need to buy the full £75bn after all.

But there was a reason why King waxed agnostic about policy before the Treasury Select Committee. He has to appear committed, but not wedded to buying government debt for its own sake.

No-one expects the policy to push up the money supply - or inflation expectations - overnight. But if there were strong signs that fears of deflation had been overdone, the Bank needs to convince the markets that is prepared to switch direction at the drop of a hat.

It needs to do this, because otherwise, fears of "too high" inflation could drive gilt yields back up again, and the short-term policy to achieve "just enough" inflation might fail.
Confused? You may well be. But I haven't even got to the really twisty-turny part, which is how all this signalling to the markets interacts with the government's fiscal policy. There's a short- versus long-term dilemma there as well.

You'll remember that Mervyn King had something else to say to the Treasury Select Committee the other day, about the risks of another fiscal stimulus package. That was also about sending a message to investors about British policy-makers' long-term commitment to price stability.

For today's high public borrowing to be sustainable, we need investors to be willing to buy our government debt in exchange for relatively low returns. That's being helped by quantitative easing - indeed, as I've said before, by reducing gilt yields, the Bank of England's purchases could save the debt management office quite a lot of cash.

But in the end, all that government debt is going to go back into the market, which means investors need to be prepared to take it on. They won't do it if they think our debt is unsustainably high, or if they think the Bank of England is amenable to a policy of inflating it away.

That's why it made sense for Mervyn King to voice concerns about further fiscal stimulus in his evidence to the Committee. He needs to send the signal that he cares about Britain's debt levels in the medium term - even if right now, his officials are busy buying up every government bond they can find.

As you can see, it's a tricky act to pull off.

The bottom line is that signals matter. And in the twisty world of quantitative-fiscal-inflationary(-but-not-too-inflationary) stimulus, the signals get very complicated indeed.

The Chancellor, Alistair Darling, will have to play his own version of the signals game when he stands up to deliver the budget on April 22nd. If he were to unveil a significant fiscal stimulus, to preserve credibility in the markets, he would almost certainly need to announce how he was going to get the money back.

But if you announce tax cuts at the same time as the tax rises to pay for them, it rather defeats the point. People are less likely to go out and spend windfalls if they know that money will soon be laboriously clawed back.

That's another reason to think that the stimulus measures in the budget will be very small. It also brings us back to yesterday's argument about the Conservatives, and a point that some of you thought I missed. You pointed out that announcing a fiscal stimulus package sent a particular message - that you don't care about rising borrowing - which involuntary increases in borrowing do not. In that sense, it's possible that investors do distinguish between the two.
As the margin, that is probably true. But my basic point about the Conservatives stands. As the Irish case proves, once the borrowing figures get bad enough, the markets stop thinking about the cause of the borrowing and focus on the sheer amount.

In that case, George Osborne will have a difficult choice to make. But then again, so will the government. And so will Mervyn King.

George Osborne is a brainy man and occasionally he is allowed to give brainy speeches. His recent lecture to the RSA in London was one of them.

Robert Peston has highlighted the shadow chancellor's comments about the future of on Britain's banks. Clearly the Conservatives will be a big part of this debate going forward.

As I've discussed before, the lesson of this crisis is that even the most global banks will come home to die, or get bailed out. It matters whether we as a nation - or more accurately, we as taxpayers - have the capacity to bail them out. So any future chancellor needs to decide how many big international banks for the UK is enough.

However, I'd like to focus on another part of the speech - specifically his comments about borrowing.

In yesterday's blog I said: "debt cannot rise indefinitely without raising doubts about the ability to repay. In effect, the British Conservative party thinks that the UK reached that point some time ago - which is why they opposed the UK stimulus package last November."

One of Osborne's advisors has pointed out that this was not quite the Conservatives' view. They simply thought that Britain was in danger of reaching that point quite soon, so the stimulus was not a risk worth taking.

That may sound like a distinction without a difference (and, I should say, this advisor wasn't demanding a retraction.). But in fact it does matter, and it shows up a key challenge for the Conservatives as we approach the next budget.

To see why, you only need to look at Osborne's speech. The bulk of his remarks are devoted to how to build a safer financial system for the future. But he can't resist a brief victory lap on the right and wrongs of fiscal stimulus.

The jubilant "I told you so's" from senior Tories have been echoing through the corridors of Westminster ever since Mervyn King made his contribution to this debate a few weeks ago.

Osborne joined the chorus again in his speech: "the forthcoming Budget will mark the collapse of [the government's] strategy for dealing with the recession. And it will vindicate the principle of fiscal responsibility that we Conservatives have stood by in good times and bad."

You can understand the desire to gloat. It's fair to say that Mervyn King's comments did no favours to the government.

But economically speaking, the fiscal high ground that Her Majesty's Opposition is sitting on is more like a fence - and quite a narrow, uncomfortable one at that.

Why? Well, going back to that distinction from yesterday, remember that the Conservatives are not saying that we have reached the point where additional borrowing actively hurts the economy, by pushing up interest rates.

If they were, they would logically have to follow the Irish route of proposing tax rises and spending cuts right now, to bring borrowing down.

For obvious reasons, Osborne has no intention of proposing such a budget for two weeks' time. In fact, he and others have said they do not want to stop the "automatic stabilisers" from operating (that's the rise in borrowing that is not down to the stimulus but rather the natural impact of the recession).

But, as the Institute for Fiscal Studies keeps reminding us, the rising debt levels that the Conservatives are so concerned about have almost nothing to do with the fiscal stimulus package last November - it accounts for less than 1/15th of the total rise in debt expected between now and 2012.

It's true that the Conservatives think that borrowing was too high going into this recession, and that was within the government's control. But as far as I know, Osborne doesn't think we should be trying to reverse things right now, with the recession still raging. Nor have they suggested the government should have spent much less on bailing out the banks, which the IMF thinks could add another £130bn to Britain's debt.

All the Conservatives will say is that another stimulus package - like the first one - would be a step too far.

Perhaps the shadow chancellor thinks the markets can distinguish between voluntary and involuntary government borrowing - and it's the voluntary, stimulus borrowing that investors really object to. But if that's true, someone needs to tell the Irish. They haven't had any fiscal stimulus packages, yet the markets have bullied them into a tightening all the same.

What matters to the investors who fund our government debt is not the cause of high borrowing, but how large it is relative to the economy, how fast it is growing, and whether or not the government has the will to bring it back down.
Put it that way, and the Conservative's "principle of fiscal responsibility" starts to look rather arbitrary.

After all, back in November, they thought that borrowing was high to afford a roughly £12bn a year short-term stimulus. Now borrowing for this year alone is expected to be about £17bn more than we thought, with none of that extra borrowing due to the stimulus. Yet, as we approach the budget, the Conservatives still say it's only extra stimulus measures that we can't afford. All that other borrowing for this year is somehow OK.

The worse the figures get, the harder that position may be to sustain.
For, if the numbers do continue to deteriorate, the logic of the Tory position is going to point ever more firmly in the direction of an Irish-style budget-tightening - even if the economy is still heading downhill. Brainy as he is, it will be interesting to see how far down that road the shadow chancellor is willing to go.

Why on Earth are they doing that? That would be a reasonable first reaction to unveiled this afternoon.

In the teeth of the worst recession in decades, the government is raising taxes, for the second time in six months.

The G20 leaders may have endorsed a global effort to kick-start the global economy, but for Ireland, it's tightening all the way. What gives?

The answer isn't that Brian Lenihan, Ireland's finance minister, gets a kick out of inflicting pain. There's method to his madness. And also some lessons for the UK.

The first lesson is that, if you're lurching further and further into debt, there comes a point when fiscal stimulus isn't very stimulating at all.

Here's the basic argument. If the markets believe that the public finances are out of control, they demand a higher and higher return for buying government debt. And a higher interest rate for government borrowing means higher rates for everyone else as well. So, the negative impact of that rise in borrowing costs may more than outweigh the positive effect of extra government borrowing.

Everyone accepts that a country will reach that point eventually. Debt cannot rise indefinitely without raising doubts about the ability to repay. In effect, the British Conservative party thinks that the UK reached that point some time ago - which is why they opposed the UK stimulus package last November.

Others are less certain, but the possibility of future funding problems is one reason why the likes of Mervyn King and the International Monetary Fund think it is so important for governments to accompany any stimulus plans with a credible plan to get borrowing back down again.

Clearly, a big fiscal stimulus plan for Ireland was not on the cards. Before today's mini-budget, the government was looking at a deficit of around 11% of GDP this year and 13% in 2010. And that's all down the effect of the recession - they haven't had any stimulus plans to speak of.

But at first glance, you might think a fiscal tightening was a bit over the top. After all, Ireland's stock of debt is low - a mere 25% of GDP in 2007, less if you consider that Ireland's Pension Reserve Fund is worth nearly 10% of GDP. That compares with a Eurozone average of 66%.

As Kevin Daly, an economist at Goldman Sachs, has pointed out, Ireland's debt stock is rising fast - at this rate, it could reach 68% of GDP by 2010. But by then, the Eurozone average will be over 75%.

The trouble is - investors are not relaxed about Ireland. Rightly or wrongly, they think that the Irish government is much more likely to default on its debt than even the likes of Spain or Italy. In that sense, Mr Lenihan was bullied into today's action by the markets.

Rates have fallen back a bit over the past few weeks, but the interest rate on Irish government debt is still more than two percentage points higher than on German debt. So far, Ireland isn't having any trouble raising funds, but that interest premium is a high price to pay for reduced credibility.

If investors conclude, on the basis of this budget, that the government has things under control, that yield could fall back again - and this tightening could turn out to be a stimulus.

I suspect Alistair Darling would find a tax-rising budget on April 22nd a pretty hard sell. We can't remember many stimulating tax rises. But as Kevin Daly reminded me, the Irish can.

Back in the late 1990s* 1980s, debt was over 120% of GDP, and everyone thought that a recession would be the price to pay for bringing borrowing back down. Instead, getting the government's books in order was the start of the long boom.

There's also the fact that imports account for 80% of Ireland's GDP - even if you had room for fiscal stimulus, a large part of it would flow overseas.

So, yes, it seems like an odd response to a major recession. Mr Lenihan now thinks the economy will shrink by 8% this year. And yes, it is to some extent a panic move. Investors are panicked about the collapse in government revenues - which were heavily dependent on the housing market - even if ministers are not.

But for a highly open Eurozone economy which cannot inflate away its debt, this kind of fiscal tightening was probably the most sensible thing they could do.

Being outside the Eurozone gives the UK more options, and more benefit of the doubt from market investors. We're not going to be forced into tax rises this year.

However, Britain's budget deficit this year is likely to be almost as large as Ireland's - if not larger. As the IFS pointed out yesterday, we can't afford to ignore the consequences of that borrowing any more than Ireland can.

* Apologies for the typo.

It's not going to fix the world economy, but at the G20 summit, world leaders got together and promised to do no harm. , it sounded like pretty faint praise. But in today's environment, not doing anything stupid is a good place for governments to start - and to judge by the reaction of the markets yesterday, investors agree.

Probably, you can go a bit further: the agreement may prevent some bad things from happening that might otherwise have rebounded on all of our economies. That the IMF will have the funds to help the likes of Mexico, or Ukraine, is important.

Things in Central and Eastern Europe may still go badly wrong, and the international community may mismanage its response, but at least the IMF will have the means to act if others can muster the will.

These meetings always produce big numbers that shrink on closer inspection - promises that turn out to be a bit flakier in the footnotes than the headlines implied.

Yesterday's communique is rife with them: most disappointing is the news that "$250bn for global trade" is actually $25bn in trade finance this year which may or may not help to support $250bn of trade. That's sneaky even by communique standards.

It's also true - as - that more than half of the $250bn in new Special Drawing Rights at the IMF will go to rich countries that won't use them. And half of the extra $500bn for the IMF depends on reforms to the IMF's borrowing arrangements which will take time to sort out.

All of that is true. But in a $55tn world economy, $1tn wasn't going to kick start a recovery even if it were all "real".

As the IMF's managing director told me earlier this week, the most important challenge facing the world is the toxic debt still clogging the balance sheets of the world's banks. That is not resolved by the summit - it's a job for leaders to manage when they get home.

What G20 leaders could do was provide a little bit more of a safety net to the poorest as they move through this - for many of them, the international community is the only "automatic stabiliser" they have. They could oil the wheels of trade - even if in this case it's only a few drops.

And, crucially, they could commit themselves to a set of promises against which to measure their actions over the next few years. That will be especially important if things in the global economy get much worse.

It's not a miracle. It is the inevitably flawed result of an inevitably flawed negotiation. But Avinash Persaud, the economist who was one of the few to warn many years ago of the problems building up in the financial system, told me today that the G20 summit "provides the strongest reason yet to be less pessimistic about the future."

Faint praise, perhaps, but I think that's about right.

These are the final numbers now agreed: an extra $500bn for the IMF; $250bn for trade finance; $250bn in new SDRs; $100bn for the multilateral development banks to lend to poor countries; and a$6bn increase in lending for the poorest countries by the IMF.

The support for the poorest countries was the last piece of the puzzle that aid groups were waiting for. So the grand total is indeed just over $1.1 trillion.

You can - without necessarily saving yourself. I suspect that will be the final moral of the for Gordon Brown.

It is looking like several rabbits are going to be pulled out of the hat this afternoon for a trillion dollar package to help the world. (See previous updates.)

There is plenty of real significance here - especially the general increase in Special Drawing Rights () and the new lending resources for the IMF.

You could say they are cheap commitments - as it happens, they aren't going to cost the member governments very much hard cash.

But that somewhat understates the significance. The fact is that countries such as Germany and Japan have always been opposed to money for poor countries which has no strings attached. And they feared that a global increase in liquidity - like the SDR allocation - would be inflationary. To have persuaded them otherwise is no mean feat, even if the deflationary global environment clearly made it easier.

But here's the issue for Brown: how do you bring it all home to the UK? How do you show British voters it will make a difference to them?

If other big countries do more to boost their economies, that will help ours - heaven knows, we don't have much room to do more ourselves.

If the IMF can provide help to Eastern European countries in trouble, then that will lessen the impact of those crises on us (remembering how much they have borrowed from our banks).

And more generally, if the global economy doesn't recover, there is no chance at all that the UK's will.

But - with all that, there is no getting round the fact that the greatest beneficiaries of today's summit are not in a position to vote for Gordon Brown. When the leaders have all flown home, the story in the UK may be much the same as it was before.

I am now being told that the pledge for trade finance will be larger than thought - $250bn, though as I suggested yesterday, a good chunk will be national efforts that have already been announced.

As my colleague Robert Peston says, the $250bn SDR (Special Drawing Rights) allocation is huge news, and note the significance of the number: that's the maximum increase they could do without the US having to seek approval from Congress.

Congress is relevant to the IMF money as well - the US will have to get congressional approval for its promise to lend more to the Fund, which I am told will be $100bn. But crucially, by long convention the cost will be scored at zero. Which is why the leaders are willing to take Obama's promise on faith.

For more background on the SDR issue, see my article .

Update 13:14: To clarify the point about the IMF lending and the US Congress: it's all very nerdy stuff, but the US wants to put its money in the IMF by contributing to a multilateral lending facility called the New Arrangements to Borrow.

The Congressional budget office, which determines the cost to the budget of everything the government does, has traditionally scored these contributions at zero cost because the US would effectively be making money available to a triple-A rated institution, the IMF, and getting a claim on all the IMF members in return. Boring, but crucial.

A coincidence? I don't think so. The G20 leaders just had to repeat their class photo, because a quick-witted official realised that the Canadian PM was missing from the first.

The official explanation is that he was in the bathroom, but given what I said on Tuesday about Canada's squeaky clean record, I suspect foul play. They'll be putting him behind a pot plant for the next one...

Don't believe the hype. They are still arguing over some parts of the agreement to be signed by G20 leaders tomorrow, but there's no grand ideological battle, over the nature of capitalism, or anything else.

And none of the G20 officials I've spoken to can come up with a reason for the French president to walk out.

The G20 sherpas are still debating the text as I write. But on two of the big issues - stimulus and financial sector regulation - the text is more or less agreed, and very close to where we thought it would be.

There are some disputes at the margins of the financial regulation segment - for example, over how, exactly, to "name and shame" tax havens that don't cooperate with agreed standards on information-sharing.

The French seem to be playing these procedural disputes for all their worth - after all, French presidents need victories to declare. But on the broad outlines of the regulatory system that will come out of this process - everyone is on the same page. (As I've written before, that wasn't always true, but it is now.)

The same applies to the stimulus debate. The Americans and British are pushing for clear language that says governments will implement the stimulus measures they have already announced, and do more, as needed, with the IMF given the job of assessing whether countries have done enough. They believe they have now got that commitment, especially given the .

So where are the big gaps? The gaps are numbers - most importantly, the amount of money for the IMF. As of now, Gordon Brown has an extra $250bn for the Fund, made up of commitments by the EU, Japan, China and a few others. That would double the money the Fund has to lend emerging market economies in Eastern Europe and elsewhere.

But the US wants to treble it - to $750bn. It's not clear whether they can rustle up that much extra cash in the next few hours, but they seem to be having a try.

America would put up $100bn (though strictly speaking that's subject to Congressional vote), but that would still leave another $150bn. And they still have to decide how, exactly, the money would get to the Fund.

There are other numbers up for grabs: for example, the amount of money committed to help the poorest countries, and headline figure for trade finance, which should top $100bn though quite a lot of that will already have been announced by national governments.

So, some critical details to discuss, but, once again, don't believe the hype: they're financial, not ideological.

Today's G20 award goes to the "Greatest Beneficiary of the Global Crisis". Some competition for this one, but since I was interviewing its Managing-Director, Dominique Strauss Kahn this morning, I decided to give it to the .

After all, tomorrow the G20 leaders will be giving the IMF at least another $250bn to lend, with a good chance of more to come. All for cleaning up a global financial crisis that it was the IMF's job to prevent. Nice work if you can get it.

There is a (semi-) serious point here, which I highlighted on the Today programme this morning.

The IMF has two jobs: preventing financial crises and responding to them. This raises a problem for the organisation, which you might call the curse of the counterfactual. As long as they are doing a good job preventing financial crises, people think they are no longer relevant and they should be downsized. It's only when they've failed in that side of their mission that they loom large on the global stage once more and everyone resolves to give them lots of cash.

The bigger the failure, the more cash they get. Indeed, Strauss Kahn told me that $250bn might well not be enough to put out the financial fires in the emerging market economies over the next year.

We touched on a lot of the G20 agenda in our interview - more than anything, he seemed concerned that the debate over issues like fiscal stimulus will distract governments from their number one task, which is cleaning up bank balance sheets to restore the flow of global lending. In his view the slow pace of change in that area was the largest risk hanging over the global economy today.

When I asked him about the IMF's poor record on preventing the crisis, he admitted that it had been too slow to sound the alarm. As he reminded me, the IMF changed its tune by the spring of 2008, when it called for major stimulus efforts on the basis of global economic forecasts which many at the time considered too gloomy. But by then the crisis was already in full swing.

As everyone now agrees, the world needed someone to shout out a lot earlier, when all these financial sector imbalances were building up. The IMF didn't do that, quite simply, because its leading shareholders didn't want it to.

That was partly a case of mistaken confidence. The US didn't think there was anything the IMF could teach it about regulating banks (ho ho).

But there's also the traditional problem for any early warning system: either you identify the problem early, in which case everyone says you are making an (embarrassing) fuss over nothing. Or you name a shame a country that does have serious problems to resolve, and those problems are then made a lot worse because you've highlighted them to world markets.

The answer has to be: publish and be damned. But not many organisations relish the chance to be hated by its leading shareholders.

All the G20 leaders, including President Obama, will pledge tomorrow to support a much stronger system for warning of future crises. But do they realise quite how independent any new watchdog will need to be? I have my doubts.