AdSlot 1 (Leaderboard)

Economics: End of an era

Dennis Turner

For the Chancellor, this was a big Budget, his 11th (a record) and almost
certainly his last. It was, therefore, the opportunity to sign off on a high
note and put his record in the best possible light. But, reflecting the
diminishing role of fiscal policy as a tool of economic management, the Budget
was an event of only marginal economic significance. Even though he pulled a
rabbit out of the hat in the closing minutes with a cut in the basic rate of
tax, the overall budget was fiscally neutral – in other words, he took out as
much as he gave back.

The starting point for the Budget is the Chancellor’s assessment of the
country’s economic health and, in terms of the high-level numbers, Brown’s
record is impressive. Racing through the usual catalogue of statistics at top
speed, he could boast about almost 15 years of unbroken growth (the longest
since records began in 1870), the 29 million people in employment (the highest
ever) and the benign inflation and interest rate environment. In his view, the
economy is set fair to continue growing at or a little above trend. His fiscal
numbers in the end depend on these robust economic forecasts.

Over the years, selectivity has also been a feature of the Chancellor’s
Budget speeches, and this year was no exception. While the record on growth is
undeniable, the extent to which it was underpinned by domestic consumption and
borrowing (by consumers and government) was conveniently overlooked. The
overhang of consumer debt, and the need to rein-in public spending because of
the higher than expected levels of borrowing, were problems left for his

Overall, the verdict on Brown’s macro management is that it has been good,
but not quite as good as he says it is. And he claims rather too much credit for
himself. His inheritance from Kenneth Clarke, the actions of the Monetary Policy
Committee on interest rates, and the benefits of low-cost imports from China
have all made significant, but largely unacknowledged contributions to his

On the fiscal front – the real purpose of the Budget – Brown’s performance
yardsticks are his two rules. According to the golden rule, the government will
only borrow to invest (and so the current budget has to be in surplus ‘over the
life of the cycle’), while the Sustainable Investment Rule commits the
government to maintaining the ratio of Public Sector Net Debt to GDP at a
prudent level, generally taken to be less than 40%. It was no surprise to hear
Brown announce that both rules had been met, but the figures lend themselves to
more than one interpretation.

To meet the terms of the golden rule has required niftier footwork from Brown
than is usually shown by Alloa Athletic – his favourite football team. Regular
redefinitions of the methodology and the timing of the cycle have made him
appear like a student marking his own exam paper until he gets the mark he
needs. By ending the current cycle in 2006/07, the Chancellor can claim to have
met the rule, but he will make life difficult for his successor, who will almost
certainly kick off with a deficit.

Much recent comment on the Chancellor’s policies has focused on the
inexorable rise in the tax burden. The respected Institute for Fiscal Studies
has calculated that there has been a £40bn increase in tax revenue, or £1,300
per family, over the decade he has been in office. But, in fairness to Brown,
his tax measures account for less than half of this rise, the rest the result of
measures announced by the previous Conservative government, fiscal drag and
economic developments since 1997. This Budget seems to have been an attempt to
readdress his image as a tax-raising Chancellor.

There were no surprises in the main thrust of the Budget. The Chancellor
displayed his business-friendly credentials (particularly, a well-trailed cut in
corporation tax – but only from 2008) and ‘green’ issues were also high on the
list of priorities as usual. In addition, he found something for pensioners and
families. But the familiar tendency to meddle was much in evidence, as was his
reliance on a whole range of ‘credits’ to target benefits to where they are most
needed. These have been criticised for being too complex for applicants to claim
and too expensive to administer.

His apparent largesse was in the context of the need to slow the growth of
public spending to a rate below that of GDP. Health and education spending
excepted, Brown wants the government to revert to its 1997-2001 stance, when
‘prudence’ was the watchword. Having whetted the appetite of the public sector
unions with his recent generosity, however, the Chancellor has passed to his
successor the daunting task of dampening their expectations. In many ways, he
has certainly presided over the good years.

Related reading

Philip Hammond