At this point in the political cycle, decisive policy action tends to take a back seat to vague promises. Hopes for a reasoned analysis of where the economy is now, moreover, have to give way to partisan statements about where it should or could be if only there were a different hand at the tiller. So, with the real debate on hold, it is worth taking stock of this government’s stewardship of the economy to consider what has been achieved in eight years and what opportunities have been missed.
When Mr Brown is called upon to defend his record, he will be able to point to five very significant entries in the credit column, five substantial achievements about which any Chancellor would be happy to boast. The first is ‘stability’, one of the watchwords throughout his tenure, and on this crucial objective he scores very high marks indeed. Since the last recession ended in 1992, the UK economy has enjoyed a period of unprecedented growth, which by Q4 2004 had reached 50 consecutive quarters.
As the Chancellor is right to boast, this is the longest period of sustained growth since records began in 1870. Cumulatively, this growth amounts to 41% in real terms (Europe has managed only 25%) and so living standards have been on an upward path for 12 years. It is, however, unreasonable for Mr Brown to claim credit for all 50 quarters, since he was only in office for the last 31. The Chancellor has always been reluctant to acknowledge the strength of his inheritance from Ken Clarke.
This stability has followed from the policymakers’ success in meeting the Chancellor’s inflation target. With inflation of 3% or less for 12 years, the UK is now a fully paid-up member of the low inflation club. This in turn has led to a step change in interest rates. After averaging 12% between 1977 and 1992, base rates have averaged less than 6% since, the lowest and most stable period of rates since the 1950s. The inflation and interest rate records are two more pluses for Mr Brown.
Getting the fundamentals right has given the UK continued growth in the jobs market. Having increased every year since 1993, total employment now exceeds 28 million, the highest in UK history, the fourth of Mr Brown’s achievements. The unemployment rate, moreover, at 4.6%, compares with 10% in the once-mighty Germany.
Giving independence to the Bank of England is the final major plus. It was a brave step because Mr Brown was the first Chancellor prepared to de-couple management of the economic cycle from management of the political cycle.
These are five very clear positives, but there are also some disturbing trends that are not reflected in the big numbers – yet. The fiscal deficit, for example, has been rising, and faster than the Treasury expected, as Mr Brown boosted spending on public services. What was a healthy surplus in 2001 had become a borrowing requirement of £34bn by 2004. This is in spite of the fact that the tax burden has been edging up. Although still just under 40% of GDP (and low relative to many EU countries), public sector total receipts have increased by two percentage points of GDP since Mr Brown became Chancellor.
Overall GDP growth and the buoyancy of the services sectors mask the imbalances in the economy, particularly the difficulties faced by manufacturing. This is most evident in the UK’s deficit on its international trade in goods, which in 2004 reached a record £60bn. There are a number of factors offsetting this figure, but the UK still has a substantial balance of payments deficit, a third cause for disquiet. Business has also expressed concerns about the impact of the surge in regulation that seems to have occurred since 1997. Admittedly, much of this originates in the EU, but it is estimated to have added £40bn a year to industry’s costs, the burden falling disproportionately heavily on smaller firms.
Perhaps the biggest issue is the growth of the public sector. Employment is expanding, with implications for funding – not only salaries but pensions. How the private sector can compete with the more attractive benefits and perceived job security offered by the public sector will exercise business leaders in the future.
These five debits, not yet as significant as the five credits, have echoes of the failures of the 1970s and, while Mr Brown can be satisfied with what has been achieved since 1997, there is no room for complacency. A competitive advantage once gained cannot be taken for granted, and the Chancellor will have to work hard to ensure the gains of the last 20 years are not squandered.
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