Sunday, June 06, 2004
Brown set to break record
Posted by David Smith at 09:01 AM
Category: David Smith's other articles

WHEN Gordon Brown walks down the stairs inside No 11 Downing Street, he runs a gauntlet of his predecessors. Cartoons and caricatures of past chancellors adorn the staircase of the official residence of chancellors for almost 200 years. They choose which cartoon goes on the wall when they leave.

As he walks past, Brown has been able to tick off those whose tenure as chancellor he has exceeded. There is Hugh Dalton, who resigned after leaking his budget to a journalist. There is Denis Healey, over five years in the job, the longest-serving Labour chancellor before Brown. And there is Nigel Lawson, who served more than six years.

But the big one is David Lloyd George, seven years and 43 days in the job between 1908 and 1915. And in nine days time, on June 15, Brown will overtake him to become the longest- serving modern-day chancellor. Even Gladstone, chancellor for 12 years and four months over a 30-year span, did no more than seven years in a single spell.

In today’s high- pressure politics it is an astonishing achievement. Brown used to joke about two types of chancellor: those who fail and those who get out in time.

No special celebrations are planned for June 15. Brown will be preparing for the next day’s Mansion House speech.

But, increasingly, he has started to trumpet his achievements. After holidaying in Scotland last summer, he returned with a new confidence. He began to speak proudly of the “British model” of Bank of England independence, fiscal rules and flexibility.

The view from the Treasury is that there is much of which to be proud. Is that true?

JUST over seven years ago, in February 1997, while taking a short break from the long campaign to get Labour back into power after 18 years in the wilderness, Gordon Brown and Ed Balls, his chief economic adviser, went to America.

The chancellor-in-waiting was guest of honour at a fundraising party hosted by Tina Brown for New York’s Labour-supporting glitterati.

But it was on the Washington leg of his trip that Brown and Balls were to discover the gold that enabled Tony Blair to describe his Downing Street neighbour last week as “a brilliant chancellor” and “a tremendous asset to the country”.

After a day of meetings with Alan Greenspan, chairman of the Federal Reserve Board, and Robert Rubin, then US treasury secretary, the way forward became clear.

The talk at the Fed had been all about monetary policy — interest rates. At the US Treasury, in contrast, the discussion had been about long-run economic issues such as productivity. The differences between the American system and the British one were striking.

Back in London, Brown announced new initiatives. If Labour were to win, he would aim for an inflation target of 2.5% and form a monetary committee of Bank of England insiders and outside appointees.

Full independence for the Bank seemed some way off, though, and it remained Brown’s big secret. On Tuesday, May 6, five days after Labour’s landslide victory, journalists were summoned to the Treasury for an announcement. The expectation was of a big increase in interest rates to cool the Tories’ pre-election boom. Instead, it was a small rate rise, from 6% to 6.25% but, much more important, this would be the last such decision made by a chancellor. In future, rates would be set by an independent Bank.

It was a momentous decision that defines Brown’s chancellorship. Lord Lamont, Tory chancellor from 1990 to 1993, describes it as his “great achievement”. So does Lord Lawson, chancellor from 1983 to 1989. Both wanted to grant the Bank independence but were stopped by their Downing Street neighbours.

“It is easy to take it for granted now but it was an incredibly courageous thing to do,” said Digby Jones, director-general of the CBI. “The MPC (monetary policy committee) has been hugely successful.”

One of the MPC’s founder members, the economist Willem Buiter, said it was essential for Brown. “Independence was the ideal commitment for Labour,” he said. “Independence got the markets off Gordon Brown’s back and, equally important, it got the parliamentary Labour party and the unions off his back. He could say to them: ‘I feel your pain, but I don’t set interest rates’.”

Not only was Brown more orthodox than the Tories on monetary policy, he also surprised with his rigour when it came to fiscal policy. Expectations were that he would be another tax-and-spend Labour chancellor.

He certainly taxed: he levied an immediate £5.2 billion windfall tax on the privatised utilities and a £5 billion annual raid on pension funds through the abolition of the dividend tax credit — but he did not spend. Inheriting spending plans described by Kenneth Clarke, his Tory predecessor, as “eye-wateringly tight”, Brown actually spent less.

He also committed himself to two binding fiscal rules. First, the “golden” rule of only borrowing over the cycle to fund public investment. Second, the “sustainable investment” rule of keeping government debt below 40% of gross domestic product.

Judging by the record so far, on the surface Brown seems to have got it right. The Bank has proved adept at controlling inflation, which has averaged just under 2.5% (on the retail prices index excluding mortgage-interest payments) since May 1997 — half its rate over the previous 10 years. Interest rates are close to 40-year lows.

Growth, astonishingly, has continued every quarter, throughout the Asian financial crisis, the bursting of the dotcom bubble and September 11. While every other large economy has succumbed to recession, Britain has averaged annual growth of 2.7%, compared with 2.3% over the previous 10-year cycle. The unemployment rate has dropped to a 30-year low of 2.9%.

These are impressive statistics. But how do we square this with the criticism that after the “iron chancellor” phase, Brown has reverted to “tax-and-spend”type? To what extent is the economic success of recent years built on a sea of borrowing, both by consumers and the government? How do we reconcile Brown, and his self-proclaimed determination to make Britain the entrepreneurial capital of the world, with a business community increasingly burdened with taxes and red tape? And how, in judging Brown’s record, do we deal with the matter of his inheritance? Did he take a successful economy and merely run with it, taking credit for the tough decisions by the Tories to make the economy more flexible and enterprise-friendly? To answer that, we need to go back a little further.

IN April 1992 Brown was promoted to shadow chancellor under John Smith. For Brown, then 41 and only nine years an MP, elevation to the second most important role in the party underlined his rising political star. But the new job appeared a poisoned chalice. John Major had won the 1992 election despite soaring unemployment, tumbling house prices and small businesses failing in their tens of thousands. If Labour could not win in those circumstances, could it win at all? Not only that, but Brown had inherited a set of “old” Labour policies, including raising the top rate of income tax to 50% on incomes above £30,000, removing the National Insurance ceiling (which together with the higher rate of tax would imply an effective top rate of 59%), a National Investment Bank, and renationalising the privatised water companies and the national grid.

It is to Brown’s credit that he was able to remove most of the old Labour elements.

And while he was making Labour’s economic programme safer for business and for middle-class voters, plenty of other things were going on.

Labour was handed a gift on “Black” Wednesday, September 16, 1992, when sterling tumbled out of the ERM (exchange rate mechanism) despite Britain’s foreign-exchange reserves being exhausted and interest rates being raised to 15%. From then on, the Tories were seen as having lost their long-held mantle of economic competence.

The irony was that in the aftermath of that humiliation the Tories put in place their most competent economic framework. An inflation target was set and the Bank was given an enhanced role, giving public advice to the chancellor in a form of “quasi” independence.

Taxes were sharply raised in 1993 together with a much tougher approach to public spending in response to a budget deficit that was threatening to top £50 billion.

Many economists say these changes marked the real watershed for Britain’s economic policy, not 1997. The record period of uninterrupted economic growth started in 1992, while the long run of low inflation and interest rates dates back to early 1993.

Buiter said: “The foundations for greater macroeconomic stability were laid when the UK left the ERM and the Bank took up inflation targeting.”

Brown’s advisers insist that to describe the 1997 changes as merely minor adjustments to the policy regime the chancellor inherited is grossly to underestimate their importance.

They point to the sharp drop in inflationary expectations and long-term interest rates. This was no small change in economic policy, they state, but a sea change.

The parenthood of the changes in 1997 has, for party political reasons, been obscured, but on inflation, growth and unemployment the outcome has been far better than economists predicted. Even the balance of payments, traditionally Britain’s Achilles heel, has held up well. Last year the current-account deficit was £19 billion, much lower than in the late 1980s.

Despite this, the economy under Brown has been unbalanced. Spending by consumers, and latterly by the government, has been strong. Business investment has been weak. After rising initially when Labour took office, it is now less than 10% of GDP, well below its peak of nearly 15% in the late 1980s.

“While the growth performance has been very good, there is a double irony,” said Christopher Smallwood, Barclays’ chief economist. “Brown has presided over the most extensive consumer boom in history and, having come in on the premise of building the investment society, investment has been weak.”

At about the time Brown passes Lloyd George’s milestone, consumer debt will top £1,000 billion for the first time. Treasury officials, united in their belief that the government’s economic framework has gone as far as possible to eliminate Britain’s boom-bust tendencies, are dumbfounded by the reluctance of the housing market to follow the script. With houses reckoned by some economists to be 30% overvalued, a rapid return to earth would destroy in weeks a carefully cultivated reputation for prudence.

The rise in household borrowing has been accompanied by a surge in borrowing by the government.

Brown’s “prudent” label certainly applied early on. Public borrowing in his first year, under 1% of GDP, was manageable. What followed was extraordinary. The Treasury repaid debt — partly helped by £22.5 billion of 3G mobile-phone receipts — in the three years 1998-99 to 2000-1. It barely borrowed in 2001-2. All that changed in 2002-3, however, with £23 billion of borrowing, and last year, with £33 billion.

“In his first three years he really was a cautious chancellor,” said Ruth Lea, director of the Centre for Policy Studies. “Since then the taps have been turned on and he has become the profligate chancellor.”

The figures bear her out. For his first three years in charge, government spending rose by a tiny 0.3% a year in real terms. Since then, however, it has increased rapidly, by an average of 4.9% a year in real terms since 2000-1. Increases averaging 4% a year are planned over the next two years.

Public-sector investment, squeezed to a post-war low of just 0.5% of GDP in 2000, has already doubled to 1% of GDP and is scheduled to rise to 2%.

Part of Brown’s record on employment is due to the public sector, with 509,000 government jobs created since 1998, reversing a 15-year decline.

The Treasury insists the public finances are on the mend and Brown’s fiscal rules intact. Other countries borrowed much more during the downturn.

The Tories, and many independent economists, believe that to meet his rules Brown will need to raise taxes by up to £10 billion to close the “black hole” in the public finances. Even on existing plans, taxes will have risen from 34.8% of GDP when Brown took over, to 38.3% during the next parliament, equivalent to a £40 billion annual rise. So has Brown made Britain more productive and enterprising, or will his actions undermine long-term competitiveness?

TWO WEEKS AGO, the chancellor took the stage in New York for the second UK-US enterprise summit. He insisted the government had been following a pro-enterprise agenda since 1997, including a cut in capital-gains tax on business assets from 40% to 10%, a reduction in corporation tax from 33% to 30%, and a fall in the small companies’ tax rate from 23% to 19%.

Brown also highlighted reforms of the insolvency laws and a new competition regime, including a beefed-up Office of Fair Trading and Competition Commission. He promised more to come, including a new focus on enterprise in education. Already, he said, the strategy was paying dividends, with a record 3.8m businesses in Britain, 100,000 more than in 1997.

“I’m absolutely convinced that he means it when he says he wants to make Britain a skills-based, enterprise-based economy,” said the CBI’s Digby Jones. “But he is also a taxing chancellor. We reckon that business has paid an extra £50 billion in tax over the past seven years. And the worry is that there is more to come.”

Taxes and red tape — new regulations adding up to a cumulative £30 billion on business — are the bane of firms.

“The trouble is that we have had this endless tinkering,” said Ruth Lea. “He has been the best chancellor on earth for the accountancy profession.”

The Treasury is sensitive to this charge. Officials acknowledge that business has often been bamboozled by the range of tax reliefs and incentives on offer and that, as a result, such measures have regularly bypassed the small and medium-sized firms for which they were intended.

Brown and his advisers are also sensitive to the accusation that the economy’s supply-side performance has been disappointing and that Britain has lost some of the flexibility that it inherited from the Tories.

A recent book, Microeconomic Reform in Britain, co-authored by Balls and senior Treasury officials Gus O’Donnell and Joe Grice, sets out the government’s four-pronged approach. It involves raising productivity growth, increasing and sustaining a higher number of people in work, building a fairer society and delivering high-quality public services.

But parts of Brown’s reform agenda, notably the new competition regime involving the OFT and Competition Commission, have disappointed. And the “enterprise agenda” has had only mixed success.

The proof is in the productivity figures. Conventionally measured, on the basis of output per filled job, productivity growth has averaged just 1.6% a year since 1997 compared with 2.4% over the previous seven years.

Brown’s first seven years have seen him deliver, with some caveats, an enviable macroeconomic record. The verdict on the supply side is that he has barely scratched the surface.

The long and the short of stewardship at No11

The grand old man
William Gladstone
Serving for 12 years and four months as chancellor, William Gladstone began his first term in 1852. His last ended in 1882 (when for two years he combined the role with that of prime minister). His longest continuous spell as chancellor, from June 1859 to June 1866, came under Lord Palmerston and, after Palmerston’s death in office, Lord John Russell. Gladstone was known for his parsimony and belief in balanced budgets — one economy he insisted on was that the Foreign Office use thinner notepaper. In his first spell as chancellor he was required to put up income tax to pay for the Crimean war. Later he cut both income tax and customs duties. He was responsible for the introduction of the Post Office Savings Bank to encourage those on modest incomes to save. He introduced the tradition of the red budget box and used only brief notes to deliver his record budget speech of 4 hours and 45 minutes in 1853. Fourteen years later his great rival Benjamin Disraeli managed a budget speech in just 45 minutes.

20th century record holder
David Lloyd George
Chancellor from April 12, 1908 until May 25, 1915, David Lloyd George was, like Brown, concerned with redistributing wealth from rich to poor. He took office in 1908 with a surge of reforming zeal, including the Old Age Pensions Act of that year and the famous People’s budget. The centrepiece of this was a super-tax on the rich to help pay for pensions and other benefits for the poor, as well as the rearmament of the navy. When this was blocked by the House of Lords, the Parliament Act was introduced to prevent such tactics by the upper house. He also introduced the National Health Insurance Act of 1911, which laid the foundations of the modern welfare state. Lloyd George then became minister of munitions in Herbert Asquith’s coalition war cabinet, replacing Asquith as prime minister at the end of 1916.

Longest-serving modern Tory
Nigel Lawson
As chancellor from June 11, 1983 to October 26, 1989, Nigel Lawson was the longest-serving post-war chancellor until Gordon Brown. With a formidable intellect, he commanded the Treasury in the way his Labour successor does now. Lawson had a brilliant first term, radically reforming corporation tax and other taxes, and re-establishing the Tories as a party of income-tax cutters. But his tenure was also characterised by frequent runs on sterling (on his watch the pound almost fell to $1) which often required interest rates to be raised sharply. His undoing was to “shadow” the D-mark as a prelude to taking the pound into the European exchange-rate mechanism. This policy, together with ill-timed tax cuts in 1988 — at a time when the economy was already booming — meant that Lawson suffered the ignominy of allowing inflation back into the system. To his great regret, he did not stay around to sort out the mess he had created, resigning after a row with Margaret Thatcher over her personal economic adviser, Sir Alan Walters.

Briefest reign
Iain Macleod
This chancellor died suddenly in 11 Downing Street on July 20, 1970, little more than a month after taking up the post on June 19. Iain Macleod thus ranks as the occupant with the shortest tenure in modern times. He died without presenting a budget. Macleod’s death, within weeks of Edward Heath’s election victory, changed the course of history. Widely regarded as the party’s lost leader, he had also been instrumental in the formation of Tory policy under Heath. The “Selsdon man” programme of small government, non-intervention and low taxes gave way to big increases in public spending and the Heath government’s 1972 u-turn on industrial intervention. “Nearly all the emphasis of Macleod’s approach was totally different from what happened in the next two years,” said Douglas Allen, Treasury permanent secretary at the time. Under Anthony Barber, his successor, inflation ballooned and Heath lost the next election in 1974.

The official residence
11 Downing Street
This has been the official residence of the chancellor of the exchequer since 1828, nearly a century after George II offered No10 to Sir Robert Walpole as the prime minister’s official residence. Chancellors who have subsequently made the move next door include, from the 19th century, Gladstone and Disraeli, and since 1900, Herbert Asquith, David Lloyd George, Andrew Bonar Law, Stanley Baldwin, Neville Chamberlain, Winston Churchill, Harold Macmillan, James Callaghan and John Major. Since 1945, moves from 11 to 10 Downing Street have become rarer. The average tenure in office of chancellors since the beginning of the 20th century has been just over two years, so Brown’s term is already three times the average.

From The Sunday Times, June 6 2004