Tuesday, January 07, 2003
Brown waits for industry to turn up
Posted by David Smith at 08:27 PM
Category: David Smith' s magazine articles

For years we have become used to the competence of Gordon Brown. He has been bold, he has been lucky, and he has done industry few favours. But it has worked. Whenever there appeared to be a danger that the economy was going off course, the worries have turned out to be unnecessary.

Now, however, the chancellor has reached a pivotal moment. For him, there were three big events during 2002 – the April budget, the summer comprehensive spending review (CSR) and the end-November pre-budget report (PBR).

In the budget he announced a big increase in NHS spending, and a big tax hike, deferred until the coming April, to pay for it. In the July CSR he announced big spending allocations for other departments, notably education and transport. The November PBR was mainly notable for a big increase in government borrowing, of which more in a moment.

For economists, the interesting thing about the three events was that each time economic prospects had deteriorated. Back in April many warned that Brown’s projections were too optimistic, particularly his decision to revise up the Treasury’s estimate of the economy’s long-run growth rate. The warnings were not ones that a chancellor embarking on huge boost to public spending wanted to hear, so he decided to ignore them.

By the summer, when global stock markets had embarked on a new and sickening downward lurch, the chancellor decided to stick with his optimistic view. On the day he unveiled his tens of billions of pounds more for public services, the London stock market plunged by more than 200 points.

Finally in November, some of those chickens came home to roost. Brown was forced down his growth forecasts for 2002 from his original 2% to 2.5% range to just 1.6%. No shame in that, given the rocky performance of the global economy. What was embarrassing, for a chancellor who has prided himself on his stewardship of the public finances, is that he was forced to revise up his estimates of public borrowing for this year from 11 billion to 20 billion, and for next year from 13 billion to 24 billion.

While these are big numbers, few analysts would argue, hand on heart, that they are courting disaster. Public borrowing was twice as high as this in the early 1990s. The “new prudence”, that it was better to borrow than raise taxes or cut public spending, applied (although whether it was wise to embark on such an ambitious boost to spending in the first place is another matter).

The trouble is, as in April and July, the chancellor appears to have been optimistic in his assumptions. The 2003 economic forecast is interesting in two respects. The first is that, in predicting 2.5% to 3% growth, the chancellor is more upbeat than the majority of independent forecasters. The 2004 forecast – 3% to 3.5% growth – is even more optimistic. Yet if growth is weaker than this the public finances will turn out a lot worse. Already some independent forecasters are saying borrowing will have to rise to 35 billion.

The second point is that the chancellor envisages a “dream” rebalancing of the economy, in which manufacturing output and business investment recover well but consumer spending and the housing market slow. The latter seems quite likely – the April tax rises will eat into income growth and a consensus is emerging that the housing market is riding for a fall, at least in London and the south-east.

What looks less likely is the manufacturing and investment revival. Business surveys suggest the prospects for industrial output, at least for the first few months of 2003, are at best flat, at worst down. Confidence is weak and investment plans are on hold. The best hope of any upturn is later in the year. The big danger is that the economy will lose some of its consumer impetus, without business and industry being able to take up the slack. The only boom in town then would be the one in government spending.

What did industry get from the chancellor during 2002? Not much. The main memory will be of the unexpected hike in employer National Insurance contributions, a punch in the solar plexus at a difficult time. The PBR itself merely confirmed that one of the big concerns over the next few years will be the impact of environmental taxes. Landfill tax is going to rise from 13 to 35 a tonne and, while ministers say that green taxes will not be allowed to damage competitiveness, most managers will believe that when they see it.

It is, as I say, a pivotal moment for the chancellor. The public finances are looking shaky and the government’s productivity and enterprise agendas appear becalmed. In 2002 Brown has been able to say that Britain’s economy – if not its manufacturing sector - has done better than most other countries. If we are not careful, that boast won’t last long.

From Industry magazine, January 2003

Comments
Post a comment









Remember personal info?








    •