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Economics: Time to say sorry

Rather than admit to mistakes, the Chancellor is quick to change the rules
when the figures don’t add up There were no surprises when the Chancellor
delivered his ninth pre-Budget report (PBR) at the start of December. His
assessment of what was happening in the economy today was in line with what most
independent observers have been saying for months and his view on where we are
going in 2006 is also fairly close to the consensus. Yet, in less than nine
months, he has halved his growth rate for this year and pegged back the rise for
next year, revisions which have consequences for his own finances. The scale of
these adjustments was glossed over.

That Brown made no apology, or offered few plausible explanations for the
downgrading of prospects, was equally not surprising. He has never been slow to
draw attention to his forecasts when they have proved more accurate than the
mainstream. But, now with the boot on the other foot, there was no sign of
contrition. Higher oil prices convinced no one (other countries even more
exposed to rising energy costs are growing faster than the UK) and the
uncertainties about the reliability of official data are hard to prove and too
obscure to be generally persuasive. In any event, the Chancellor is happy to use
the figures when they show him in a good light.

The fact that Brown chose to brazen out his most difficult PBR speech in a
typically robust manner, admitting no mistakes and focusing only on the
positives, should not obscure the fact that there were significant clues to his
thinking on medium and longer-term trends. As well as the now compulsory
tinkering with taxes (and there were a couple of big changes, in particular on
oil companies (see page 12) and a ‘U’ turn on domestic property and SIPPs), the
Chancellor allowed some insights into how he sees the economy going for the rest
of this Parliament. This includes quite a sharp change in the funding and role
of the public sector.

Like many of his predecessors, at times when activity is slowing, this
Chancellor is looking forward to jam tomorrow. Pressures on the indebted
consumer sector, subdued business investment and poor trade performance are
holding back the economy this year to its slowest rate of growth since the end
of the last recession. There will be some easing next year, but the projected
increase in GDP will still be below the long-term trend rate. It is not until
2007 and 2008, in Brown’s view, that there will be a strong bounce back, with
output rising in both years by a robust 3%.

It is that overall figure that matters, as well as the fact that the
Chancellor is expecting faster growth to be based more on investment and
exports, and less on the consumer than in the recent past. If it happens, it
will lead to a welcome rebalancing of the economy. Activity then will start to
look more sustainable than during the past few years, which was underpinned by
borrowing-induced spending on the high street and in the housing market.

Slower growth has an impact on the Chancellor’s tax revenues, which in turn
puts pressure on his fiscal ‘Golden Rule’. This matters to Brown, because it
demonstrates his commitment to ‘prudence’ and his determination to avoid the tax
and spend excesses of his Labour predecessors. Earlier this year, his borrowing
looked to have breached the Rule, but, again not wishing to admit a mistake, he
solved the problem by redefining the Rule.

Over this and the next three fiscal years, the PBR changes mean that the
Chancellor will be borrowing £16bn more than he thought last March. Again, he
solved the problem with another change in the definition of the Golden Rule.
Clearly, when the numbers tell the wrong story, changing the rules rather than
admit that targets have slipped, or altering policies, seem to be his preferred

Interestingly, the rate of increase in public spending, which has averaged 4%
a year since 2001, starts to slow to 2% a year as the economy picks up in 2008 a
nd beyond. The public sector’s share, therefore, starts to fall. For a
Chancellor who might well be Prime Minister by then, the issue becomes less how
much money is spent on services than whether the economy is getting value for

Measuring public sector productivity is notoriously difficult and most
judgements are based on anecdotal information. The government, however, has
asked a respected academic (Sir Tony Atkinson) to investigate the issue, and his
preliminary findings are not encouraging for the Chancellor. Of every £100 spent
on the NHS, for example, Sir Tony suggests there is only £35 worth of real
improvements. The rest is accounted for by inflation (pay and costs) and falling
productivity. As the flow of money into public services slows, performance will
be the real issue across the whole of the public sector. For the public, and
Brown in particular, it will be payback time.

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