Friday, October 27, 2006

Campaign for Common Sense

After reading Ruth Lea's piece in today's Daily Telegraph, I'm thinking of starting one.

Gordon Brown's squandered legacy By Ruth Lea

Gordon Brown is currently preparing his last Pre-Budget Report, which could be his last shout or, possibly, his penultimate shout as Chancellor. Doubtless his analysis of his management of the economy will be strong on self-congratulation and weak on self-criticism. A balanced assessment will not be on the cards. In truth, his management has been very mixed indeed.
On the plus side, there is little doubt that his move to hand over interest rate decisions to the Bank of England was sound. The Bank has performed a splendid task and delivered "low inflation stability" most satisfactorily. But even here the Chancellor has been unable to resist interfering. Quite gratuitously, he changed the inflation target from one based on the retail prices index (excluding mortgage interest payments) to one based on the less comprehensive, but euro-friendly, consumer price index.
Also on the plus side, the economy has performed reasonably creditably. Given worse management, it could have performed far worse. This may be seen as damning his management with faint praise. It is meant to. An analysis of the economy that Mr Brown inherited from the beleaguered Tory government, whose reputation for economic competence collapsed on Black Wednesday, and today's equivalent does not make happy reading.

In 1997, the economy, after the traumas of the early 1990s, was performing remarkably well. Post-Black Wednesday, Norman Lamont made hard, but very necessary, decisions on fiscal consolidation and introduced inflation targeting. These policies were consolidated by Ken Clarke and, along with the supply-side reforms of the Thatcher era, provided the conditions for economic recovery. Inflation moderated, growth was strong, unemployment fell, the balance of payments improved and the public finances were transformed.

Indeed, when Mr Brown made his triumphant entry into the faded Edwardian grandeur of the Treasury building (since refurbished at great expense), the healthy state of the economy was explained to him. Apparently an official had said to him: "These are fantastically good figures – the state of the economy is much better than predicted." To which his reply was: "What am I supposed to do about this? Write a thank-you letter?" He did not write a thank-you letter. Instead, he vilified the Tories' record, not least on the public finances.

Fast-forwarding nine years, it is clear that, while the economy has not been wrecked, it no longer performs as well as it did in 1997. You will not be hearing this from Mr Brown on Pre-Budget Report day. GDP growth has slowed when compared with the Major years, especially when allowance is made for the impact on growth of the large-scale immigration experienced since mid-2004. And this is at a time when the world economy has been, on the whole, remarkably benign. The performance of the manufacturing sector has been dire. Even though there has been a rise in employment, much of it in the public sector, unemployment is also now increasing quite sharply. Productivity growth has decelerated significantly, despite Mr Brown's procession of policies for "meeting the productivity challenge". Even inflation is now picking up.
The deterioration in the current account of the balance of payments has been dramatic. In 1997, it was almost in balance; last year, the deficit was £27 billion. Deficits of this size can be financed – but not without damaging Britain's net asset position with the rest of the world.

But the biggest macroeconomic horror relates to public finances. When the Tories left office, public sector finances were moving towards surplus. The Chancellor added to this potential treasure chest by raising taxes – most notoriously by removing tax credits for dividends paid to pension schemes, which has so damaged occupational pensions. This was Mr Brown's "prudent" phase, when he was storing up treasure for a "purpose".

The purpose was, of course, the subsequent massive injection of funds into public services, especially the NHS. It is difficult to comprehend just how rapidly public spending has shot up on the Chancellor's watch. It is huge, even allowing for inflation. In financial year 1997-98, total spending was about £320 billion; by 2005-06, it was £520 billion. And its share had risen from 39 per cent of GDP to 42 per cent.

The folly of injecting huge chunks of cash into the unreformed public services and the ever-expanding public sector has been debated on many occasions. The evidence of falling productivity and wanton waste of hard-earned resources is little short of scandalous. And, of course, taxes have been increased substantially to pay for Mr Brown's folly. Britain's tax-GDP ratio is rising at a time when most other OECD countries have realised that heavily taxed economies underperform and destroy individual incentives.

But even with Mr Brown's tax increases, public finances, far from heading towards balance as they were in 1997, are now stubbornly, structurally, in the red. Even on the Chancellor's own forecasts, which should always come with a health warning, public sector borrowing is expected to be £36 billion for the current financial year. Given that the economy has been growing since 1994, the unhealthy state of the public finances should be regarded as a major achievement of irresponsible mismanagement.

Sadly, too, general economic competitiveness has deteriorated over the past nine years. Not only have corporate taxes risen, but the horrendous complexity of the tax system is self-evident to anyone who ventures inside the covers of Tolley's Tax Guide. Regulations, some home-grown, many from the EU, insidiously creep into and fur up enterprise. The extension of employment regulations is especially troublesome. The Chancellor talks the talk on being business-friendly, but most emphatically does not walk the walk.

The Chancellor's record is nothing to be proud of. He inherited a golden legacy, and has squandered much of it. One thing is for sure. His successor's inheritance will not be golden. But he will have one thing in common with Mr Brown. He will not be writing a thank-you letter, either.

Ruth Lea is the director of the Centre for Policy Studies

No comments: