Monday, March 01, 2004
Gordon Brown's date with destiny
Posted by David Smith at 04:39 PM
Category: David Smith' s magazine articles

As Gordon Brown prepares to deliver his penultimate budget before the next election, two things will be firmly on his mind. The first is that, as chancellor, he is already looking very long in the tooth.

I’m referring, of course, not to his age – there have been plenty of older chancellors – but his longevity in the job. Last year he overtook Nigel Lawson (chancellor 1983-9) as the longest serving post-war chancellor. This year, assuming he stays in post, he will in June overtake David Lloyd George (1908-15), who currently holds the record for the longest in the job since 1900.

If Brown wants to beat the all-time record, held by William Gladstone, he has a few more budgets to deliver. Gladstone is easily the longest-serving chancellor, spending a total of 12 years and four months at the Treasury, although admittedly in four separate spells over a 30-year period, 1852-82. The great Victorian also puts all his rivals to shame in terms of despatch-box endurance, once delivering a budget speech lasting 4 hours and 45 minutes, using just a few brief notes to help him along.

Most British chancellors have managed to get into trouble long before clocking up anything like Brown’s time in the job, let alone that of Gladstone. And that’s the second thing on Brown’s mind. Is this the time when a successful chancellorship goes off the rails? Now that the prudence of the early years has given way to borrowing on a huge scale is his period of tenure at the Treasury, like that of so many of his predecessors, doomed to end in failure?

In December, presenting his pre-budget report, Brown came clean on the size of this year’s black hole, 37 billion. That was not as big a deficit as some independent estimates, although it exceeded others. Significantly, it was 10 billion above the Treasury’s previous estimate, in last April’s budget, and nearly four times the borrowing level officially predicted for 2003-4 just a couple of years ago.

That 37 billion will, in all likelihood, survive more or less intact in the coming budget. While nobody can ever predict these things with precision – government borrowing is the difference between the two very large numbers of spending and taxation – something rather bad would have to have happened to the public finances in the past few weeks to make a much larger borrowing figure plausible.

The problem, instead, comes as the chancellor peers into the future. His budget projections, while still being finalised in the Treasury, will almost certainly maintain the downward profile for borrowing that was a feature of his pre-budget report. This year, in other words, is as bad as it gets for the public finances.

In 2004-5, if he sticks to this profile, public borrowing will be a few billion below the 37 billion for this year, and it will continue to trend very gradually downwards after that. In the context of a generally accepted shift into stronger economic growth, it looks plausible.

Except for a couple of things. Tax revenues have a tendency to lag behind economic growth. The Treasury, which played a long game of “hunt the missing revenues” in the first half of the 1990s, knows this only too well. It has been criticised for assuming too speedy a return to strongly growing government receipts.

Another problem is on the expenditure side. Although the chancellor has been making tough noises about reining back public spending, there is a lot of momentum behind the present increases. And even if most programmes can be brought under control, there is the not-so-small matter of the National Health Service, guaranteed 7%-plus real annual growth in spending through to 2007-8.

There’s an additional problem. We became used, during the first 3-4 years of Brown’s tenure at the Treasury, to the borrowing numbers coming in consistently better than expected, and for his fiscal rules being comfortably met. The two rules, to remind you, are the golden rule of only borrowing to finance public investment (as opposed to current spending on, say, wages and salaries) and the “sustainable investment rule” of keeping the public sector’s net debt below 40% of gross domestic product.

Now, even on the Treasury’s own figures, the golden rule is only narrowly met over the course of the present economic cycle. Most independent economists, on the other hand, think it will not be met, and that taxes will have to go up by about 10 billion – but not until after the next election – to meet the rule. Public sector debt, meanwhile, will creep towards that 40% level, albeit it only slowly.

Analysts are also coming to realise what the golden rule means in terms of extra borrowing. The government’s investment programme is worth 25-30 billion a year. Borrowing that much each year would have been regarded as irresponsible not so long ago. Now it is becoming the default position for the government.

Does any of this represent a serious challenge to Brown’s reputation? After all, the economy continues to grow, and interest rates, inflation and unemployment are all low. The fiscal rules are under threat but they are, it should be said, self-imposed. Not only that but, unlike in previous episodes where British chancellors have got into difficulty, there is no suggestion this time that fiscal problems are unique to Britain.

America has a budget deficit of 5% of GDP, compared with just over 3% in Britain, Japan is running a 7% deficit, while both France and Germany have burst through the 3% limit allowed for deficits under Europe’s stability and growth pact. The chancellor is in good company and he has things under better control than most of his finance minister colleagues.

All that is true, and it helps explain why Brown is facing up to his fiscal problems with confidence. There are signs, however, that the public is tiring of tax hikes and the slow pace of delivery when it comes to public services. It also becomes more difficult for Labour to claim the high moral ground over the Tories on economic policy, as it could when borrowing was firmly under control. High borrowing will continue to erode the chancellor’s reputation.

From Professional Investor, March 2004