In terms of day-to-day economic management, the Budget has become a bit of a sideshow. The key now is monetary policy and interest rates rather than fiscal policy and tax, and so it is the monthly meetings of the MPC that matter and not the annual Budget. But for Gordon Brown, delivering his set piece on the state of the economy and government finances is a key date in his diary, and this one mattered as much to him as any of the previous seven.
It was, in the first place, a record-breaking eighth Budget speech for the Chancellor, passing Denis Healey’s record set in the 1970s. Second, it was likely to be the penultimate Budget before the next election, which both posed a problem and offered an opportunity to an astute politician like Gordon Brown. The problem was that it constrained his freedom to address the real issue that worries analysts: the ballooning gap between the government’s tax receipts and its spending. It is too late in the political cycle to introduce fundamental changes. It did, however, give him the chance to set out his party’s priorities for an election campaign.
Perhaps the most important aspect of the Budget was that it gave Brown an opportunity to remind the country how well he has been doing at the Treasury since 1997. It was an open goal and he did not miss. In fairness, it is a good story. At a time when most of the major economies of the world have been struggling, the UK has been doing rather well. We have had the longest period of unbroken growth since records began in 1870, employment (over 28 million are currently in work) is now at an all-time high and our inflation/base rate combination is the best since 1945. He had been faithful to his old friend – stability. The benefits of this success, particularly less spending on unemployment and lower debt payments, provided the backdrop to the Budget.
For all the good news, the Chancellor has been less true to his other great love – prudence. In 1998, to show how determined he was to avoid the ‘tax and spend’ charges that had undermined previous Labour Chancellors, Brown announced two fiscal rules. The Golden Rule is meant to ensure the Budget was in surplus over the life of the cycle, while the Sustainable Investment Rule is intended to keep public sector debt below 40% of GDP.
These are more stringent conditions than the Maastricht Treaty demanded for entry into the single currency and it is by these rules that Brown would want to be judged. Clearly, he appreciates the contribution fiscal stability makes to a sound economic environment.
While the Sustainable Investment Rule will be met comfortably, there are doubts about the Golden Rule, which is under threat as a result of the huge spending plan on public services that began in 2002. Again, in fairness to the Chancellor, much of this spending was a catch-up after years of neglect, but he was unlucky with the timing. The shortfall in tax receipts has undermined his plans.
Rather than trim his spending he has chosen to borrow, and far more than he anticipated. In his 2002 Budget, he forecast borrowing would be £13bn but has now admitted it will be more than three times higher – £37bn.
Each estimate of borrowing has been higher than the previous one and, as a consequence, he is pushing up against the limit of his Golden Rule.
He has retained, however, his belief that all will come right in the end and that a strong economy will deliver the goods. But it is a hostage to fortune and if there is slippage, the gap will widen again.
Despite the fact that many independent observers believe the Treasury will need about £10bn extra a year, equivalent to 4p-5p on income tax on a long-term basis, Mr Brown left borrowing broadly unchanged. He chose not to reduce the gap, either with spending cuts or tax rises. There will be some curb on spending, but this will have to wait for the summer’s Comprehensive Spending Review. So close to an election, higher taxes were never likely to be the Chancellor’s preferred course. Besides, his choices on tax were constrained by past promises, particularly on income tax, and to venture into new territory, such as some form of taxation on housing, was too risky at this stage of the political cycle.
So fudge was the order of the day. The Budget’s economic forecasts were more buoyant than many believe likely but faster growth will push up tax receipts and keep the Chancellor within his Rules. Gordon Brown is a compulsive tinkerer, and changes at the edges have become part and parcel of Budget day.
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