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What are the most intriguing economic questions for 2010? Here are my top four. I'm sure you can come up with others.

1. Will QE need a Plan B?

The dearth of credit around the major advanced economies has monetarists convinced that the world is heading for a double-dip. I'm not sure I agree, but the lack of finance available for the UK corporate sector is a serious worry.

As the MPC know well, buying nearly Β£200bn worth of gilts as part of quantitative easing is, at best, a roundabout way to ease credit conditions for British firms.

QE has helped push up asset prices, as it was supposed to to, and triggered a flood of UK corporate bond issuance this year. But I suspect the government's rather under-rated "time to pay" initiative, giving companies extra time to pay their tax, has done more to support the working capital of Britain's small and medium-sized enterprises.

At the Treasury and the Bank, they're still crossing their fingers and hoping that QE will have more impact on lending throughout the broader economy in the first half of 2010 - just as all the economic models suggest it should.

But behind the scenes in Whitehall and the Threadneedle Street, they are quietly thinking about a Plan B - some more direct way to channel credit to firms. Just in case.

We'll know by the spring - or summer, at the latest, whether it's needed. But whatever happens, I'd be surprised to see the Bank of England create a lot more money than already agreed. If Β£200bn doesn't work, it's hard to believe that an extra, say, Β£50bn is going to make all the difference.

2. Will Britain's showdown with the international bond markets come before, or after the election?

Everyone thinks that the markets will politely wait until Britain has gone to the polls to draw its verdict on the UK. Well, maybe.

But if sovereign debt is indeed the new sub-prime - at least where the markets are concerned - it's difficult to believe that Britain will get through the months before the election without at least one major market wobble.

Perhaps one ratings agency will put the UK on negative watch. Or investors will get seized with the idea of a hung Parliament. Or Britain will simply get caught in the crosshairs of a market panic over sovereign debt in Central and Eastern Europe.

Who knows what the trigger will be. But my hunch is there will be something, this side of polling day. The question will be how the major political parties react.

3. Will the private sector finally show up for the US recovery?

For anyone outside the UK this would probably be the first question on the list. Chances are, US growth in the last three months of 2009 will make up for yesterday's downward revision to growth in the third quarter, to an annual rate of 2.2%. But the new data brought home once again how lopsided the US recovery has been to date.

All the growth that the world's largest economy achieved in those three months was due to government demand, "cash-for-clunkers", and rising inventories. And the personal savings rate actually fell, suggesting that the adjustment process for households is rather less far advanced than people hoped.

2010 was supposed to be the year when the Federal Reserve could start taking its foot off the floor, and the Obama administration could at least sketch out a road map for bringing that enormous budget deficit back down. It still could be. But if the private sector doesn't show up, the administration's going to be doing the sums for yet another stimulus package as well.

4. Will the Euro area start to look like deflationary zone?

I took part in Oliver Kamm, the Times writer, suggested that, in its handling of the financial crisis, the single currency had passed it's first major test "with flying colours".

It's certainly true that many potential disasters that policy-makers worried about in Europe earlier in the year have not materialised.

Eurozone ministers - notably the German and the French - looked into the abyss and realised that they could not afford to deal with this crisis the way they usually did. In the financial market environment of early 2009, there was no room for long months of obfuscation, followed by fudge. A clear message was sent that no country would be allowed to fail. And it worked.

But that was then. Now, Germany and the rest are pulling out of recession - even if we may wonder how strong that recovery will actually be. And that moment of solidarity may be passing as well.

I don't think that the likes of Greece or Ireland - or Spain - will default on their debt. But even the very best scenario for them, inside the Euro zone, is a long hard slog. And that long hard slog of slow growth, and savage cuts in public spending could have deflationary fall-out for everyone else.

I'm not the only one who's worried about this. Check out . He's a former Federal Reserve economist, now governor of the central bank of Cyprus. And he thinks there is a serious risk of "inflation continuing to undershoot".

He said "I think we can already say that we have avoided an experience as terrible, as catastrophic, as in the 1930s". I'm glad he thinks so. But, as I've discussed before one of the main factors that made the depression great - and global - was the deflationary impact of the gold standard. Unwilling to devalue, countries resorted to deflationary domestic policies to pay their bills, thus exporting the deflation problem to everyone else.

Europe in 2010 is not Europe in 1931. Nothing close. But if policy-makers aren't thinking about the potential for a more damaging dose of deflation in the Eurozone, they should be.

So that's my top four. Not a cheery list, perhaps. But I don't know many Western economists who are upbeat about the next few years - especially the UK.

Given our past record, that's probably the best reason to think that 2010 will be a Happy New Year after all. I will see you then.

Freud used to talk about the "narcissism of small differences". It seems an apt description of the debate about Britain's third-quarter GDP.

in the third quarter is better than the first, and better than the second. But as far as the official numbers go, Britain is still in recession.

Anyone convinced that the recession ended between July and September will have to wait a bit longer for vindication. If they get it at all.

By itself, the large upwards revision in construction output I reported a few weeks ago would have produced a 0.2 percentage point upward revision, to a decline of 0.1% in those three months.

But recent downward revisions to output in both the production industries and the service sector have led to just a 0.1 percentage point nudge up, to -0.2%.

Not quite what the Christmas present we were after. But there is at least one piece of encouraging news in today's release: the household savings ratio in the third quarter rose to 8.7% of income, compared to 7.6% in the previous three months.

That's a surprisingly high number - the highest in more than a decade. Just 18 months ago, households weren't saving anything at all.

This kind of retrenchment by families is what they mean when they talk about the "headwinds to growth" in the broader economy over the next year. It's not good news for retailers if households have ratcheted up their saving.

But at some point, we knew households were going to save more in response to the recession. They always do. And we also knew that it was important for savings in the economy to go up to put the recovery on a more sustainable footing.

On the face of it, it is good news if some of that turns out to have already taken place. But that's assuming, as ever, that the turns out to be right. As we have been learning, that is at least a medium-sized 'if'.

It looks like good news - if only I knew for sure.

The labour market is usually the last to recover from a recession - but right now it's almost leading the rest of the economy out.

, the first since February 2008; the smallest quarterly rise in the broader measure of unemployment since spring 2008; a 53,000 rise in the number of people in work.

These are not figures you expect to see, in an economy still not formally out of recession.

I would love to say this is yet more evidence that the economy is growing after all - and/or that the UK labour market is now so flexible that companies can slash production and hours while keeping many more of their employees in work.

Both of those will be part of the explanation for these surprising figures. But I fear they cannot be the whole story.

For starters, if we say that flexibility has helped us see only a 2% fall in employment - following a roughly 6% fall in output - we have to explain why exactly the opposite has happened in the super-flexible USA.

America has had one of the less bad recessions of the G7 countries, with a peak to trough fall in national output of 3.7%, yet their unemployment rate has roughly doubled, and total employment has fallen by more than 4%.

Germany, on the other hand - that resolutely unflexible, non-Anglo-Saxon economy - has seen an even smaller rise in unemployment than we have, following an even tougher recession.

Their national output has fallen by more than 6%, while employment has fallen, well, it hasn't really fallen at all.

Far from becoming more American in this recession, the argument would have to be that British employers have become more German, holding on to their skilled workforces much more tightly than they ever have before, but cutting hours to reduce the impact on the bottom line.

That's definitely happened in Germany: even though employment has barely budged, Simon Kirby at the NIESR calculates that average hours in Germany have fallen sharply, by more than 4%.

But we have a good explanation for that - the government's short-time working scheme, which has produced a dramatic rise in the number of Germans working on short-time contracts.

There's no similar scheme in the UK - most of the government's efforts have been focussed on the youth end of the labour market.

But we do hear a lot about people working on shorter contracts or part-time (the number who say they are working part-time because they can't find anything else rose again this month). Is that why unemployment has not risen further?

Well, it's part of it. But Kirby thinks that average hours have only fallen by around 1% in the UK since the start of the recession.

So labour inputs, overall (taking into account what's happened to employment and to hours) have fallen about 3% - compared to a 4% decline in Germany and a nearly 12% fall in the US.

There's been a wage response too. As I've mentioned before, wages have held steady, and even fallen, in some cases, in this recession - whereas in the past they carried on going up.

That's helped employers keep workers on, even as it has squeezed household incomes and apparently forced many women back into part-time work.

But that effort to keep job losses down has affected the bottom line: unit labour costs are going up, and productivity has collapsed. (Inevitably, if employment falls by much less than output, output per worker is going to go through the floor.)

This could all work out well. If we see a strong recovery next year and employers are able to make up the ground they've lost - indeed, a strong recovery would reward their decision to hold on to their staff. But, as we know, a strong recovery is not what most economists expect.

However welcome it may be in the short term, there has to be a danger that the smaller than expected rise in unemployment is storing up trouble for the future.

Either companies will find they have to lay off staff after all - and the expected rise in the jobless numbers will lag even further behind the recovery than it usually does.

Or they may struggle against competitors - not least, American ones, who've shed labour so aggressively that productivity has even gone up. That, in turn, could make a slow recovery even slower.

It's one of those times that economists rain on everyone's parade, and at Christmas time, too. Sorry about that. But remember - if we get that strong recovery, this might all be good news after all.

UPDATE, 14:35: Just to add a bit of content to what I said about earnings taking some of the strain: today's November figures show public sector earnings growing by 2.8% in the past 12 months.

Public sector employment also rose, another factor propping up the figures. But private sector earnings (excluding bonuses) grew by 1.4% in the year to October down from 1.7% in November, and a new low.

As has pointed out, there are five sectors where that measure of earnings growth has actually turned negative, including construction, textiles, and, yes, financial services. His chart is worth a lot of words on the subject.

Incidentally, some of you have suggested that onerous redundancy procedures are also part of the story. You may be right.

I guess the question would be whether it has discouraged lay-offs - as in comment three - or simply delayed them. The first sounds a bit Germanic, and possibly not such a bad thing if - that big if again - we have a strong recovery. But if they've simply been delayed, that sounds like another reason to expect the growth in the jobless to pick up again next year.

There's been a lot of talk about Britain losing its AAA credit rating down the road. But guess what? As far as the markets are concerned, we already have.

I've been taking a look at what's happened to the spread on UK sovereign credit default swaps (CDS) - in effect, the cost of insuring against a default on UK sovereign debt - relative to other highly rated countries. The answer is highly instructive, if not a little depressing.

The UK sovereign CDS spreads were extremely low, and very close to the average of other AAA-rated countries for most of 2007 and 2008, as you'd expect. Since the onset of the crisis, all the spreads have gone up - again, as you'd expect. But this year a gap has opened up between us and some of the others.

It's not a consistent story (these are financial markets, after all). In fact, we did move back toward the AAA group in the early autumn of this year - but since then the trend is unmistakeable.

Judged solely in terms of the implied risk premium on UK debt, the market now considers us very close to an AA country, like Japan, Portugal or, er, Ireland.

Now we see, perhaps, what the head of the Treasury's Debt Management Office, that he did not think a formal downgrade from AAA would necessarily have a big impact on the cost of government borrowing.

It might very well not have much impact, if we'd already been penalised in the markets, long before the downgrade actually took place. And in fact, that is how it has tended to go with other downgraded countries like Japan.

If you're the government - or generally, of an optimistic frame of mind - you could have the following positive lines to take on all this.

One would be to point out that this is not the same as a downgrade - it's merely a reflection of market sentiment. And market sentiment can go up as well as down.

We may be paying a similar rate on our debt to Slovenia, but all that could change next month. And unlike them, with our AAA stamp we still have the full range of institutional investors out there able to buy our gilts.

He or she could also point out that the CDS market is a pretty unreliable guide to the future - often more a fancy form of spread-betting than a true reflection of bond market sentiment.

You do have to wonder why anyone would bother to enter into a CDS genuinely to hedge themselves against a US sovereign default. A default by the US would be such a cataclysmic event, it seems unlikely, to put it mildly, that any counterparty to such an insurance policy would ever be in a position to cough up - or that it would matter much to the policy holder even if they were. There would be so much else to worry about if the unthinkable ever occurred

Another positive line - somewhat riskier, perhaps - would be to say "hey, you're all so worried about our blessed AAA. But cheer up: to all intents and purposes, we've already lost it, and the world hasn't come to an end after all. The cost of servicing our debt is still far lower than it has been in the past."

As I said, that would be a risky strategy for a minister. But it's true that the life doesn't come to an end when you go down to AA. (Though it does get a bit more expensive).

But here's what you say if you're the Conservatives - or for some reason you just want to be depressed.

We haven't lost our AAA rating. But looking at our borrowing numbers, international bond market investors don't trust us as much as they did a year ago.

In recent months, that has shown up in the gilt market, as well as in rising CDS spreads. It is harder to compare gilt yields across countries in a meaningful way given different expectations about future growth and interest rates, but the UK has been punished more than many other AAA countries in recent bond market declines (which have the effect of pushing yields up).

And, remember, this is in an environment when, as it happens, international investors have not actually been called upon to buy many UK gilts.

All told, the Debt Management Office reckons that the supply of UK gilts will go up by Β£208.5bn of gilts in 2009-10.

But, as Simon Ward, at Henderson, points out in a note today, thanks to the Bank of England's policy of buying up nearly every gilt they can get their hands on, net supply to the market will be a mere Β£25bn, down from Β£110bn in 2008-09 and the lowest annual total since 2002-03.

Assuming the Bank doesn't do the honours next year, Ward calculates - on the basis of pretty reasonable assumptions - that net gilt supply will be Β£150-175bn in 2010-11, ie six to seven times that amount. That's quite a lot for the market to swallow.

I've mentioned before the possibility that the UK commercial banks might come to the rescue, buying up tens of billions of pounds' worth of gilts, to comply with new higher liquidity standards.

Robert Peston returned to the issue last week. All I would add to his comments is that the FSA's estimates of how much the banks might need to buy - published, with the new guidelines, in October - are based on an entirely static assessment of bank balance sheets as they are right now, which currently contain a lot of short-term debt.

Precisely to avoid having to take on all those gilts, you would expect banks to respond to the new regime by raising the maturity of their liabilities - indeed, that is a key goal of the whole enterprise.

So the amount they will actually buy, in practice will almost certainly be lower than the FSA's static estimate. (Though it could still amount to a tidy pile of gilts).

That's a subject for another post. All I would point out today is that, if the market continues to rate us alongside the AAs, people I speak to who make these calls for a living tell me it's only a matter of time before one of the ratings agencies thinks they must say something about the UK - or else risk seeming hopelessly out of touch.

We've said a lot about the conflicted position of the ratings agencies in relation to the banks and other financial institutions. Everyone agrees that the agencies shouldn't have been financially dependent on the institutions whose assets they were rating.

But now the spotlight is turning to sovereign debt, and we see that the same conflict - writ gigantic - is there in the relationship between the ratings agencies and governments.

Countries such as the UK are desperately hoping to hold on to their AAA ratings, just as the ratings agencies wait to find out whether their critical position in the international financial system is going to be taken away by - er, countries like the UK.

Of course, the ratings agencies insist that politics plays no part in their decisions. far be it for me to suggest otherwise. But you have to at least call it a conflict of interest.

, for all the talk of downgrading the position of Moody's and the rest, so far there's been remarkably little action to back that up. But it's still what you might call a sensitive time if you're a ratings agency wanting to hold on to your role.

The bottom line is that we now have even more reason to expect 2010 to be an "interesting" year for UK sovereign debt. And for the ratings agencies themselves.

Paul Samuelson, who died yesterday, aged 94, was probably the most influential American economist of the 20th century. Certainly, no thinker did more to turn economics from a scattered selection of ideas into a social science.

What makes economies grow? When and why do companies choose to invest? Does international trade cost jobs? There weren't many big questions in economics that Samuelson didn't lend his brain to. He once boasted: "My finger has been in every pie." When they started a Nobel Prize for economics in 1969, they gave the second award to him.

As his friend Paul Krugman has commented:

"[M]ost economists would love to have written even one seminal paper - a paper that fundamentally changes the way people think about some issue. Samuelson wrote dozens: from international trade to finance to growth theory to speculation to well, just about everything, underlying much of what we know is a key Samuelson paper that set the agenda for generations of scholars."

Samuelson did much to bring maths into the subject - in The Foundations of Economic Analysis he showed his fellow economists how equations could help them predict how households and businesses would behave. Critics now would say the mathematical turn took the subject away from the real world - eventually giving economists too much faith in abstract models, like the complex equations for estimating risk which have lately got the financial markets into so much trouble.

But if there's a link between Samuelson and our current troubles - and frankly I think it's a bit mean to draw one - it's a link that goes to the core of all of modern economics. For, whatever economics is today, for good and bad, it is, in no small part thanks to him.

His most famous student was a recently elected John F Kennedy, to whom he gave his first economics class on a beach near the Kennedy compound in New England in 1960.

With his seminal textbook - Economics - Samuelson brought the ideas of John Maynard Keynes to generations of students around the world.

As I discussed in my recent Analysis programme, (The Economist's New Clothes), some of Keynes insights - especially about the nature of uncertainty - got lost in Samuelson's effort to incorporate Keynes into the mainstream. But had it not been for Samuelson, Keynes might not have found his way into the standard textbooks at all.

Samuelson was lucky to have come to the subject when he did - when modern economics was just beginning. It would be all but impossible for one individual to leave such a mark today. "I don't care who writes a nation's laws - or crafts its advanced treatises" - he once said. "if I can write its economics textbooks".

Note: I wrote a longer for the Financial Times.

As usual, the Institute for Fiscal Studies (IFS) has pulled an all-nighter and extracted some gems from the r. Here are the key headlines.

First, the independent think-tank estimates that the chancellor's new forecasts for public spending from 2011/12 to 2013/4 would represent a real cut in departmental spending of 3.2% a year, slightly more than the previous estimate of 2.9% after the budget.

That amounts to a cumulative cut of Β£36bn over the period.

The protections to frontline schools and other key services for 2011 and 2012 suggest that all non-protected areas would face cuts of 6.4% a year in those two years - or a cumulative Β£25.5bn.

On National Insurance, they say experience suggests employers will pass on the rise in employers NI. If so, that would mean that only workers earning less than Β£14,000 a year would be protected from the rises in NI announced yesterday, not Β£20,000 as the chancellor said.

However, the IFS confirmed that the top 10% of earners would bear most of the brunt of the tax rises planned for 2010-11 - eventually facing a hit to net household income of 5% - if they don't take steps to avoid paying it, a big if in the case of the very highest earners, who face the biggest hit.

Other groups will face hits of 1% or often much less. That would seem to confirm the figures from Labour yesterday (see my other blog today), that the top 2% of taxpayers would pay half of the new taxes.

Carl Emmerson, the IFS's senior fiscal guru, was asked about Conservatives' claims that the NHS would lose out from the pre-Budget report (PBR).

He said he thought that was doubtful, given that the cost of the rise in employers' NI (which, as we have already established, would probably be paid by employees, anyway, not the NHS) - would need to be weighed against the savings to the NHS of having a lower wage bill from 2011 onwards.

Not to mention that 95% of the NHS budget is being protected from real cuts in 2011 and 2012, at considerable cost to other departments.

And finally, I can confirm that Β£73bn is the new Β£90bn. Two days ago there was a Β£90bn a year hole in the budget that the government - any government - needed to fill, either through tax rises or spending cuts. Now it's Β£73bn.

We'll never know exactly how much the budget needs to be squeezed. But Β£73bn is a good enough guess to be getting along with.

Before the PBR, Alistair Darling was planning to rely mainly on tighter spending to fill that hole, at least in the first few years of the plan. That's still true, but the balance has shifted sharply in the direction of higher taxes.

Instead of Β£1 pound in new taxes for Β£4 of cuts in 2013-14, the ratio in that year will be one to three.

Of course, that's assuming that all those top earners don't manage to suffer a large and inexplicable fall in their taxable income and pension contributions in the meantime.

Or flee the country - as they always threaten to do. Or persuade a Conservative government to let them off the hook.

The IFS also confirmed that the chancellor has not revealed where much of that cumulative Β£36bn cut in departmental spending will be found.

Towards that number, the government has sad it will find efficiency savings worth Β£12bn; it will also get Β£3.4bn from the 1% cap on the public sector pay, Β£1bn from reforming public sector pensions, and Β£5bn from eliminating "lower priority" projects, some of which are listed in the report.

That leaves about Β£15bn unaccounted for, but it's important to remember that any savings on low priority projects, or from added efficiency, which are found in the protected areas - which represent a significant chunk of public spending - will not count toward the Β£36bn because they will be ploughed back into those protected budgets.

In reality, the government will need to find much more than Β£15bn in additional savings to meet the Β£36bn cut imbedded in its forecasts, assuming the IFS's calculations are right.

I spoke about the difficulties of measuring efficiency savings on Monday - even where the government has claimed to have achieved savings in the past, they have not all added up.

If further reason were scepticism were needed, the IFS points out that the government has already promised to achieve some Β£35bn in efficiency savings in the current spending round, which ends in spring 2011. So far they are only Β£8.5bn of the way to the Β£35bn target, leaving a big mountain to climb in the final year.

Update 1817: There's been a bit of confusion about this, but the total cost of fixing the hole in the budget over the next 8 years is going to be the equivalent of Β£2,400 per family, per year, in the form of higher taxes or lower spending and investment. Unfortunately, that's not cumulative, it's annual.

And what about the Conservatives? Well, it's tricky to compare the Chancellor's plans with George Osborne's, because he has committed to protect the NHS for the full three years from 2011-14, whereas Labour has only mentioned the first two years.

The Tories haven't committed to protect schools (yet), but they have followed the government's commitment to increasing ODA.

On this basis, the IFS reckons that they would need to find cuts of Β£38.9bn on non-protected departments - which, on the face of it, sounds worse than Labour. That is certainly what Treasury officials have been keen to impress on the British press corps this afternoon.

But - and believe me when I say that this pains me more than it pains you - it turns out that it's more complicated than that. That Β£38.9bn isn't really comparable to the Β£36bn figure (sigh), because the Β£36bn is the cut facing all departmental spending, if you weren't protecting anything, or increasing ODA.

If you take those pledges into account, the cut for other departments under Labour looks very similar to the Conservatives'. And it would be larger, if Labour decided to protect the "frontline" for three years rather than two.

If the Tories would rather not get into all this detail, they have another way to respond to Labour's claims that Conservative cuts on other departments would be worse than the government's. It goes likes this: "we're having to cut other things more because we're protecting the NHS for the full three years. Are you saying you won't?"

It was never going to be easy. In his pre-Budget report the chancellor had to boost his government's standing with the electorate - without lowering it with international investors.

The result was a speech which seemed to do a lot of things - but left the broad picture for the public finances remarkably unchanged. And remarkably bleak, even if the structural hole in Britain's budget is now slightly smaller than the Treasury thought.

For all the rhetoric about supporting the recovery, the chancellor is not planning to spend much more next year than he was at the time of the budget (see my earlier PBR blogs).

But he is spending more than previously forecast in both 2011 and 2012 - in total, nearly Β£15bn more. And he's using rosier deficit forecasts, and higher taxes on everyone earning more than Β£20,000 a year, to pay for that "protection" for frontline services.

Liam Byrne, the Chief Secretary to the Treasury, told Newsnight that 60% of the new taxes being raised would be paid by the top 5% of earners.

No 10 says that half of the revenues raised by the chancellor since last year's pre-Budget report have fallen on the top 2%.

You get the idea. But the National Insurance rise will not only be felt by the rich.

The question will be whether voters buy the idea that it's needed to protect those "core" public services, even though the "protection" only lasts two years (2011 and 2012), whereas the new tax revenues will run and run. As will the tight plans for the rest of public spending.

For their part, investors - and rating agencies - will look at the report and see a chancellor who is broadly meeting his deficit and borrowing forecasts.

But they will also see a chancellor who is not using an improvement in the underlying position - that roughly 1% of GDP fall in structural borrowing I discussed in early posts- to cut borrowing faster than before, as the likes of the IMF and Mervyn King have urged.

In fact, debt as a share of GDP is going to start falling one year later than before, though by recent standards the slippage is pretty small.

Alistair Darling is also planning to raise taxes, and increase spending, in years when the Treasury is expecting economic growth of 3.5%.

Come 2011, if the economy does look fairly strong, in the real world investors would be looking for the chancellor - any chancellor - to take advantage of that growth to speed the effort to cut borrowing.

He (I think we can assume it will be a he) might be punished in the bond markets if he failed to take that opportunity and stuck to these plans. In other words, the long-term cost of servicing the debt might well go up, as would borrowing costs for UK companies.

But investors and ratings agencies know that we are not living in the real world right now. We're living in the lead-up to a general election.

So far, they seem willing to wait to hear from the winners of that election before making a definitive judgment about the UK.

The Conservatives would rather the markets were less patient. If investors started openly to question Britain's credibility as a borrower, George Osborne might have more chance of persuading voters of the need to be more hard-nosed about the budget than Alistair Darling was this week.

But it's not as if the path sketched out by the chancellor was all sweetness and light.

In the end, the PBR tells us what we already knew: there really are no easy ways out from here.

Alistair Darling found that fine line to walk between the demands of the City, and those of his party. But he won't have left either of them very happy. Such are the options for a country borrowing more than 12% of national income this year - and next.

Everything changes - and everything stays the same. Continuing my earlier theme, the chancellor has but not changed the big picture - which is that he will not spend very much over the next few years, and will halve the deficit as a share of GDP.

There were all those expensive-sounding announcements - all that help for businesses in recession that he is "extending", the cut in bingo tax and the rest. But miraculously, the amount he's planning to spend next year has barely budged. He said total spending will grow by Β£31bn in 2010-11 - or by 2.2% in real terms. At Budget time, the forecast was for a rise of, er, Β£30.3bn in Total Managed Spending in 2010-11 - or growth of 2.9%.

Likewise, he now says current spending will grow by 0.8% a year in real terms after 2011. At Budget time, he was expecting it to grow by 0.7% a year over that period. I suspect the difference may be partly explained by that Β£3bn tax rise to pay for a further increase in health and other spending in 2011 - but, as ever, I can't be sure until I see the fine print.

UPDATE, 13:54: I was right about the structural deficit. The Treasury has revised down its estimate of the true "hole" in the public finances - the part of borrowing that won't go away as the economy recovers.

At the time of the Budget, he expected a structural ("cyclically adjusted") deficit of 8.9% of GDP in 2010-1. That's now come down to 8%, probably because GDP itself is going into 2010 smaller than they thought.

That fall follows through to 2013-4, when the structural deficit is now forecast to be 3.6%, not 4.5% as in the Budget. That's making it a bit easier for the chancellor to meet his headline goal for the deficit.

But deficit hawks will note that he has not used this improvement in the underlying picture - if it really has improved - to speed up his efforts to cut borrowing. That is what the IMF and others have urged in the past - that any "windfalls" that came the chancellor's way should be put into faster deficit reduction.

The prime minister will be relieved that the chancellor resisted the "temptation" to do this, six months before a general election, (some temptation...). But he's missed the chance to win extra points from the likes of Mervyn King.

UPDATE, 15:10: A tiny addendum to my comments on the structural deficit.

You might be wondering how the poor performance of the economy this year has reduced the hole that the government needs to fill. (If you want to cut structural borrowing, tank the economy - who knew it was that easy?)

Let me explain: they expected the economy to shrink by 3.5%. Instead it shrank by 4.75%. Yet, borrowing is more or less unchanged.

Ergo, they must have been wrong about the amount of borrowing that was due to the state of the economy. If they'd been right, borrowing would now be much higher than expected - and backbenchers would have had more to jeer about when the chancellor read out the numbers.

So, to repeat myself, the structural deficit appears to be smaller than we thought. At least, if this new estimate is right. We might find out, next year, that the first set of forecasts was right after all.

The lesson is that the dividing line between "cyclical" and "structural" borrowing is as porous as a sponge - and some would say, not much more useful for setting economic policy.

Estimates of the "structural" deficit are useful for informing discussion of the budget squeeze ahead. Every decent forecaster has to have one. They're a useful guard against the political temptation to wait for growth to magic all the borrowing away.

Just don't make the mistake of thinking the numbers are set in stone.

As of today, we have a new Treasury estimate of the amount that taxes "must" rise, or spending "must" fall, in the next few years to bring borrowing back on a sustainable course.

But if history is any guide, the truth will be much worse than they think. Or much better.

This is that's all about the rhetoric of growth - and not "putting the recovery at risk" with over-hasty cuts in spending. But so much for the rhetoric. What about the numbers?

We know that the headline borrowing figures - right through to 2014 - have scarcely changed since April. That would be surprising in any year, from a government that has habitually had to revise its borrowing figures by at least Β£10bn, even one year ahead. In the Budget, he revised them up by nearly Β£60bn.

To achieve this result when the economy has done so much worse than the chancellor hopes - and there is so much else going on - is impressive.

Treasury officials had always said, privately, that they had inoculated the borrowing figures against the effects of politically-imposed optimism about the economy. We can't know for sure until we see the full report, but it appears to be true.

If the borrowing figures haven't changed markedly, that suggests that the efforts to squeeze spending - and to raise taxes - to fill the budget hole have not changed either.

Though I will be looking to see whether the balance between tax rises and spending cuts has changed - previously the ratio was about 1:4 - that is, Β£1 in tax rises for every Β£4 saved through spending cuts.

However, he may have a get-out-of-jail-free (or get-out-of-jail-less-expensively) card, in the form of a decline in the structural budget deficit. If that shortfall - the bit that won't go away with the economic recovery - has fallen, then he can achieve those headline borrowing targets with a bit less pain. But I can't say for sure until I see the full report.

Deadbeats or dominoes? It's the question of the day.

Fitch, the ratings agency, would say that its decision to downgrade Greek sovereign debt had nothing to do with events in Dubai. But ever since the Dubai World story broke, investors - and ratings agencies - have been taking a fresh look at the indebted countries on Europe's periphery, wondering whether any of these countries will be next (see my post of 27 November, Just a sideshow?).

Greece isn't the only country which would rather not have the extra attention. There's plenty for the likes of Latvia and Ireland to worry about as well, and a sombre warning for the UK, too - though, as Moody's made clear in its sombre assessment today, Britain is still a very long way from being Greece.

True, Alistair Darling is borrowing nearly as much as Greece this year - its deficit is nearly 13% of GDP, like ours. But there the comparison ends. At least for now.

Greek debt is forecast to rise to more than 130% of GDP by 2011, almost double the level forecast for the UK. And the IMF forecasts a Greek current account deficit this year of 11% of GDP.

There are not supposed to be any bail-outs for Eurozone economies who can't pay their bills - or no formal ones, anyway. The treaty establishing the single currency expressly forbids them. But for the past two years, Greece and other hard-pressed economies on the Eurozone's periphery have been getting the next best thing to a bail-out, courtesy of the ECB.

Here's how it works: indebted government sells lots of bonds to domestic banks; banks then use bonds as collateral to get shedloads of (nearly) free money from the ECB.

As well as achieving the avowed end of increasing liquidity in the European banking system, the policy had the unstated, but equally welcome (to many European officials) effect of propping up the demand for the indebted country's debt.

It's not a formal bailout. But it certainly helped.

Were it not for the ECB, the Greek government would have been paying a lot more for its debt, and worrying the ratings agencies long before today.

As this chart (courtesy of Capital Economics) shows, since the collapse of Lehmans, Greek banks have borrowed the equivalent of a tenth of their balance sheet from the European Central Bank. Irish banks have been almost as keen. We can't say for sure, but European central bank officials have assured me in the past that the collateral for much of this borrowing was domestic government bonds.

Traditionalists within the ECB didn't like all that "peripheral" sovereign debt landing on the ECB's balance sheet. Yet the politics of equal treatment within the Eurozone - plus a great desire to pre-empt the need for more formal support - meant that the traditionalists didn't get a choice. It was a case of noblesse oblige.

But now comes the tricky part. As part of its cheap liquidity policy, the ECB had been allowing banks to use BBB - that is, debt as collateral - a loosening of the usual rules. But that is due to run out at the end of 2010, with the ECB once again requiring A- or better.

That's a large part of why Greece has been hammered in the markets following today's downgrade to BBB+. Come next year, European officials (and not just Greek ones) may be asking Frankfurt to remain "flexible" a little longer. But there's a limit to what even back-door support from the ECB can do.

If the downgrade sticks, Greece will be under enormous pressure to do more to fix its fiscal hole, despite a weak economy. Ireland has already done it, and they're due to do it again tomorrow.

That is why the no-bail-out clause is there: it's supposed to give governments no alternative but to clean up their act. Germany was particularly insistent that the clause be there when the single currency was created. There would be no running to the Brussels - or Frankfurt - if governments got into a fix.

But that's the theory. European officials don't know how it will work when confronted with a real-life debt crisis within the Eurozone.

Investors have long suspected that the politicians would find a way round the clause if they had to - there are various possible get-outs in the Treaty should they decide to use them. But no-one knows for sure.

That's why there could be plenty more "busy" days for European sovereign bond traders in the months to come.

We all believe the savings are there to be had. We just don't trust the government to find them.

That is one big reason why politicians announcing a big push on efficiency savings will seldom win a lot of a points.

The other reason - and there's no polite way to say this - is that the more genuine the savings are, the more boring they are likely to be.

You know the drill. We hear a headline number - like the Β£3bn in new savings over three years - and we say; "ah, politicians have promised that kind of thing before. Tell us how, exactly, you're going to do it."

But then, heaven forfend they actually do. We're asleep in five minutes. We wake up at the end declaring we've "heard it all before".

I'm exaggerating. But veterans of past efficiency campaigns will recognise the basic pattern.

There's a three-page list of detailed proposals in the .

I'm sure you will all rush to read it, but in case you don't, the plans range from a blunt promise to "reduce consultancy spend by 50%" to more esoteric items, like ensuring that "all overseas staff are supported by shared services provided through a single platform".

Some, like the promise to halve consultancy spending, look more likely to save money than others (p64: "arrange an international conference to share best practice on smarter government...").

But the hard truth is that, even if implemented, you will never be sure that any of these measures saved the government cash. Why? Because of Stephanomics' old friend, the curse of the counter-factual.

Sure, it's easy, in four years' time, to establish whether central government is spending less on consultants. But it will be almost impossible to prove it is spending taxpayers' money more wisely as a result.

It's an unfashionable thought, but some of that outside expertise might, just might, have helped departments to spend less overall. We will never know.

The government's first efficiency drive, initiated by , aimed to find Β£21.5bn in savings by 2007. In the end, the government claims to have saved Β£26.5bn over that time (Gordon Brown repeated the claim this morning).

But, , the National Audit Office assessed the programme when it was part-way through, and found that only about a quarter - 26% - of the Β£13.3bn in savings then being claimed by departments "fairly represent efficiencies made". Just over half - 51% - "represent efficiency but carry some measurement issues and uncertainties"; and 23% "may represent efficiency, but the measures used either do not yet demonstrate it or the reported gains may be substantially incorrect."

To translate: one quarter of the savings were the real thing, a quarter were downright dodgy, and the remainder were somewhere in between.

When the report came out in early 2007, critics of the government understandably pounced on it as evidence that the entire exercise had been a scam.

Given how often the Β£26.5bn figure is trotted out by ministers, it's a shame that the NAO has not done a final audit of the Gershon programme.

However, another report would face the same curse. It's hard to prove you've "saved" money if, by definition, that money wasn't ever spent - or, more likely, it was spent on something else.

That is why the next round of efficiency savings will be a bit different than the ones that came before. Unlike the previous ones, they won't be about getting more value for money out of an expanding budget pie. They'll be about making the shrinking of the pie less painful for frontline services than it might otherwise be.

After the next election it's going to be much easier for ministers to convince voters that they are spending less: whichever party is in power, the evidence will be there for all to see in the shape of shrinking department budgets. The challenge will be convincing us that the "right" things are being shrunk.

Guess what. The recession might have (almost) ended in the summer after all.

The ONS said this morning that construction output rose by 2% in the third quarter of this year. Why does this matter? It matters because in calculating what had happened to the whole economy in those three months, our official statistical body had reckoned that construction output had fallen, by 1.1%.

Other things equal, that would mean that the 0.4% decline in GDP announced in October, which has already been revised up to 0.3%, would be revised up again on 22 December - to a decline of just 0.1%.

Statistically speaking, a decline of 0.1% is really no decline at all. It's also not far off what many independent economists were expecting when that first estimate came out on 23 October - and caused such a shock.

Does this mean the "sceptics" are right and the ONS was wrong? Well, hardly. Until we see the third version of the GDP figures in a few weeks' time, we don't even know whether the numbers will be revised upwards that far.

But those who doubted the first set of numbers will feel that history is moving their way.

It's always possible that there will be other "new news" about the third quarter that pushes the figures the other way - but there's no sign of anything yet, and looking at the figures to be released between now and 22 December, it looks fairly unlikely. (Theoretically, both the index of production and retail sales numbers for November could include revisions of previous months which affect GDP, but there's no reason to think they will.)

Yet, even if the economy did flatten out from August onwards, there is little sign that it is storming ahead. Quite the reverse.

The news we have had so far of the start of the fourth quarter has not been that great: the CIPS/Markit surveys for manufacturing and services both came in lower than expected in November.

True, the data still point to some modest growth in output in the last three months of the year. The Treasury will be especially gutted if the economy fails to expand now: if there were going to be any measurable impact of the temporary cut in VAT, you would have expected to see it in these three months, as consumers buy now before prices go back up.

It will be a happy Christmas for the government if the GDP figures do get revised up in a few weeks' time. But as , it's not time to celebrate just yet.

Any Conservatives listening to Ben Bernanke's confirmation hearing in the US Senate will have enjoyed what he has just said about Gordon Brown's tripartite system of financial regulation.

Though the Obama administration would like to beef up the Federal Reserve's regulatory powers, some powerful Senators want to strip the Fed of its power to monitor and supervise US financial institutions. Bernanke, predictably enough, would rather they didn't.

If you want to see why it's dangerous to take that kind of authority away from the central bank, he said, you only need to look at the experience of the UK:

"[O]ver the past few years the government of Britain removed from the Bank of England most of its supervisory authorities. When the crisis hit - for example when the Northern Rock bank came under stress - the Bank of England was completely in the dark and unable to deal effectively with what turned out to be a destructive run and a major problem for the British economy.

So currently the trend in UK and elsewhere is quite the opposite of taking away those authorities - it is to give the central bank the authority and information it needs to know what's going on in the banking system... for financial stability maintenance I think it's very very important for the Fed to have that kind of information and insight into the banking system"

Mervyn King will not take kindly to the idea that he was ever "completely in the dark" - about anything. He might also point out that the Fed didn't do such a great job handling Lehman Brothers. But you get the point.

The senator questioning Bernanke noted that more than half of the G20 economies do not give supervisory authority to their central bank, and some of them had come through the crisis rather better than the US. He also said he thought the fault of the British system had been the FSA's "light-touch" regulation and the lack of more comprehensive deposit insurance (apparently, some US senators take a keen interest in Britain's travails).

Nonetheless, it's striking to hear the world's most important central banker citing the UK as an example of what not to do. Time was when the UK tripartite system of financial regulation was a role model for the world. Not any more.

Ken Clarke has warned his senior Conservative colleagues not to sound "too adventurous" on the subject of spending cuts before the election. , which has a recording of his remarks to a private meeting of MPs on Tuesday night.

Clarke is worth listening to - he's got more experience in government than most of the rest of the Tory front bench, put together. He will go down as one of the better chancellors of recent times, though he was not in the job very long.

However, in this case he's preaching to the converted. George Osborne and his team weren't planning to tell us much more about their spending plans this side of polling day.

That's why they keep reminding us how "brave" Osborne's speech at the party conference was: on the courageous front, that's pretty much all we're going to get. Talk of a hung parliament will have hardened their view.

As we saw earlier in the week, the prospect of an uncertain election result is also concentrating minds in the markets.

On balance, I felt the reaction to was rather overdone. I and others have long said that investors and rating agencies would hate the prospect of a hung parliament.

When you talk to ratings agency folk, they always say the strength of Britain's executive is one of our great assets. We may make a mess of things, but when it comes to it, a British PM would always be able to get the difficult things done. They don't want him to be making repeated visits to the Queen.

We know that a hung parliament wouldn't necessarily be a disaster. On budget matters, you might think foreign investors have little to fear from Vince Cable or Nick Clegg.

Still, the UK has a 12% of GDP deficit and a general election coming up. In these circumstances, it would be strange if the likes of Morgan Stanley were not alerting their clients to the risk of stormy weather in the market for gilts. The research note was highlighting possible "surprises" for 2010. That is clearly one of them, and it wouldn't really be so surprising.

Note the excruciating irony in all this for the Tories. Yes, "adventurous" talk of spending cuts may hurt their lead in the polls. But that very decline in popularity also makes the case for dramatic action on public borrowing that much easier to make.

Senior Conservatives can't be seen to be talking Britain down or fuelling panic in the markets - you'll note they were quite careful not to make hay, publicly, with the Morgan Stanley remarks.

But talk of losing triple-A status - or a run on the pound - makes the Conservative argument better than any number of speeches by Cameron or the shadow chancellor. Pity - that won't be much comfort to any of them if they wake up after polling day with no overall control.

"You think things are bad here - you should see Japan!" For policy makers grappling with the financial crisis, Japan has long been the cautionary tale.

It still is, and not just for the reasons that you think. This week's surprise moves by the Bank of Japan show us how uncomfortable it can get for a central bank trying to combat deflation - when the government is running up a mountain of debt.

When their stock and housing market bubble burst in the early 1990s, Japanese policy makers took years to grasp that they had a systemic financial crisis on their hands. They've been paying the price for that delay ever since.

As the chart below from a useful presentation by Fitch shows, official interest rates have now been zero for a decade. Persistent sub-par growth means that spare capacity is now estimated to be an unprecedented 10% of GDP - and public debt is approaching 200% of national income.

Western officials pride themselves on having avoided Japan's mistake. There were some mis-steps in the early stages, but by Japanese standards the monetary and fiscal policy response to the credit crunch was massive and swift.

As a result, we have probably avoided a repeat of the Great Depression. But that's setting the bar for success pretty low. After all, Japan avoided that fate as well. A better question is whether we've avoided the Japan scenario of persistent deflation. That's come back with a vengeance in Japan in the past two years: in cash terms, the Japanese economy has probably shrunk by more than 7% since 2007.

Until we see the shape of the US and global recovery we can't say anything for sure, but we haven't followed Japan down that road yet.

However, the Japanese car crash might also concern us for another reason: it may show us how difficult it can be for central banks to reflate the economy when the government is unwilling, or unable, to cut public debt.

On Tuesday the Bank of Japan announced they were going to offer up to Y10 trillion in three-month low-interest loans to banks - after a surprise meeting, ahead of the regular one scheduled for a few weeks' time. Though short and long-term interest rates did fall a little, investors were fairly unimpressed.

Continuing a long tradition of bickering between central bank and finance ministry, the finance minister, Hirohisa Fuji had been pushing for more traditional quantitative easing - ie central bank purchases of Japanese government bonds. This is what they did, on a grand scale, between 2001 and 2005, with mixed results.

It seems the central bank resisted his call because they are worried about the long-term implications of the astronomical debt - and they don't want to let the government off the hook by helping to keep the cost of public borrowing low.

But of course, if you're the Japanese government, it's a catch-22: you think the only way you're going to be able to cut borrowing is through reflation, and the only way there's a hope of that happening is through more quantitative easing by the BoJ.

If credit remains weak, the central bank will probably have to relent with more bond purchases, even if public borrowing remains high.

Graham Turner, at GFC Economics, thinks there's a clear moral for the rest of us:

Note that he is not predicting problems for the UK right now. Unlike Japan, we have not had a significant structural budget deficit every year since 1992, and the UK's stock of public debt is a fraction of theirs.

Right now, we are not having any trouble financing our debt: and, I should add, neither is Japan: the yield on 10-year Japanese government debt is now only 1.2%, the lowest it has been in a year. (Of course, in a country of falling prices, the real yield is higher.)

But when it comes to servicing a high level of public debt, Japan has one big advantage that Britain lacks: a persistent current account surplus. As a nation, they are net savers, meaning they do not have to rely on the rest of the world to buy their debt. With roughly a third of gilts held by foreigners, that is very clearly not the case for the UK.

So Japan's example provides yet another reason for Mervyn King to bang on about the need for a credible plan to bring down public borrowing.

The Bank of England gets no pleasure out of buying up a large part of the market for government bonds. It will stop as soon as it can - possibly February (see my post on 18 November). But the MPC needs the economy, and the bond markets, to cooperate.

The great dread is that they will get caught in the middle, like the Bank of Japan; forced by the continued weakness of credit to buy more government bonds, even as the market frets over how that debt is going to be repaid. If you think things are bad now - you should see what happens then.