Sunday, March 06, 2005
The two faces of Gordon Brown
Posted by David Smith at 11:00 AM
Category: David Smith's other articles

With one bound, it seems, he is free. At the start of the year all the talk was of Gordon Brown’s “black hole” and the certainty that, while he would not be so foolish as to do so before the election, he was bound to raise taxes afterwards.

Now, just weeks later, Ed Balls, the chancellor’s former trusty assistant, the Tonto to his Lone Ranger, is dropping broad hints to political journalists about giveaways in the March 16 budget.

He is no longer, it should be said, advising Brown in the Treasury, protocol having required that he leave his job there to fight the safe Labour seat of Normanton, near Wakefield in West Yorkshire. But he still reflects his old boss’s thinking pretty well and he will no doubt be back in the Treasury as a minister at some stage if, as expected, Labour secures a third term.

Once more we are left to ponder the true face of this chancellor. Is it “prudent” Brown, lashed to the mast of his own fiscal rules and determined not to do anything to risk Britain’s “hard-won stability”, as he told journalists on his recent visit to China? Or is it “political” Brown, the one prepared to mix it with anybody when it comes to bribing voters with their own money, and perfectly capable of throwing caution to the wind?

There is a bit of Labour history here. The late Roy Jenkins, chancellor from 1967 until 1970, adopted a cautious and prudent approach and was widely blamed in the party for losing the 1970 election to Sir Edward Heath’s Conservatives.

Denis Healey, chancellor from 1974 until 1979, could never be described as prudent and cautious. He announced budget giveaways in the run-up to the 1979 election, even though the public finances were only just recovering from a near- disastrous deficit. Both saw their parties lose, but Labour folklore has it that Healey gave it his best shot but Jenkins did not.

There is a flavour of that now. Allies of Tony Blair, or of Alan Milburn, are quoted as being concerned that Brown is “sulking”. This is partly because he is not throwing himself into the election campaign with his usual gusto, having been relieved of the task of running it. But it also reflects a worry that the chancellor may unveil a boring, non-political budget, one that concentrates on equipping Britain for the long-term challenge from China and India. Behind this worry, in turn, is the suspicion that Brown may not see his best interests in another thumping Labour majority.

Not only would that show that the campaign had gone perfectly well without him at the helm, but it would embolden the prime minister to move him to the Foreign Office, something Brown regards as the political equivalent of being sent to Siberia.

Talk of a £5 billion budget giveaway, Brown’s advisers insist, is not coming from them. Rather, it is a crude attempt by others in the party to bounce the chancellor into being irresponsible, something he will not do. But what are we to make of it when Balls says the fiscal rules will be met “with a margin to spare” and that he is hoping more can be done “to support families, pensioners and our other priority areas”?

A few weeks ago, talk of any giveaways in the budget would have seemed fanciful. But a big revival in corporate tax revenues — which, to be fair to the Treasury, it predicted — has changed the picture. Brown is not yet out of the woods, and many analysts are still forecasting big third-term tax hikes, but they are doing so with less certainty than before. The black hole, at the very least, has turned a shade of grey.

Another helpful factor, albeit less important than the tax revival, is the reclassification by the Office for National Statistics (ONS) of some road-maintenance expenditure as capital rather than current spending, giving Brown an extra £3 billion or so to play with before he breaks his golden rule. Some see the timing of this change as evidence that a supine statistical service always does the government’s bidding, but that is harsh. The ONS was correcting an error. But the change was useful.

How useful? Well, there is no doubt that “political” Brown would dearly love to announce tax cuts and extra spending worth £4 billion in the budget. That is the amount of taxes Oliver Letwin, the shadow chancellor, has said he will cut in his first budget if the Tories are elected.

I can almost hear Brown saying, at the end of a tub-thumping speech, that not only has he met his fiscal rules, not only has he poured tens of billions into public services, but he has also matched a Tory giveaway predicated on spending cuts.

But how would £4 billion look to “prudent” Brown? The political risk is that it would look like a crude bribe that would backfire if the Bank of England’s monetary policy committee (MPC) were to raise interest rates before election day, of which more below. The Tories would be quick to pin the blame on the chancellor’s fiscal irresponsibility.

That is why the word from the Treasury is that Brown will not be tempted into any kind of giveaway. The fiscal position is still tight and the chancellor came closer than he has cared to admit to breaking his golden rule. He may still break it. The focus will indeed be on making Britain flexible enough to cope with the challenge from China, though the chancellor’s aides insist this will not mean a boring budget.

Where does this leave “political” Brown, and those hints from Balls? This chancellor is a master of the reannounced initiative and unveiling policies for pensioners and children that sound good during a budget speech but cost little. He could take his cue from the Liberal Democrats and raise the £60,000 stamp-duty threshold a little, at not much cost to the Exchequer.

So the young, the old, and maybe some homebuyers can expect a few crumbs from Brown’s table. Business, and the rest of us, will wait with some trepidation until after the election to find out whether the fiscal position is quite as healthy as he will assure us it is.

PS: A big response — and plenty of additional explanations — followed last week’s piece on why the economy does not feel as successful as the figures say it is. I will return to that soon. But this week the MPC, having put us on orange alert on base rates, demands attention.

Last week I suggested that if the MPC is determined to raise rates, it should have the courage to do so before the election.

But just in case that was interpreted as supporting the principle of raising rates, let me clarify matters. I am genuinely puzzled by the Bank’s sudden hawkishness. It comes at a time when retailers are struggling, when even the housing market’s best friends concede that activity and price rises have slowed, and when sterling’s strength is adding to industry’s troubles.

The Bank is also operating with a new and untried measure of inflation, the consumer prices index. It showed inflation unchanged last month while the old measure showed a significant fall. So what is worrying the Bank? It is concerned that the economy has used up all its spare capacity and that growth has to be reined back to prevent inflationary pressures from re-emerging.

That view, however, rests on two big uncertainties, which the MPC has conceded in the past. The first is the amount of spare capacity; the second the effect on inflation as it is used up. In an economy that has become accustomed to low inflation (it is now embodied in people’s expectations), the Bank may be worrying unduly. The case for higher rates is weak.

How will the MPC see it? Mervyn King, the Bank governor, said in January we would not get a true picture of retail sales over the Christmas and new year period until “Easter, or possibly later”. There are plenty of other uncertainties around. A rate rise this week wouldn’t be a huge shock. But it would be a mistake.

From The Sunday Times, March 6 2005

Comments

There’s a tide which taken at the flood… Well, Gordon missed the boat at the end of last year when it comes to his chances of becoming PM. If he’d struck then he would have been ushered swiftly to the top job by a relieved party and a grateful nation. But the opportunity has gone.

I think Gordon has done a good job on tweaking the system to reduce poverty but he’s not helped business enough – the people that create wealth in the first place. He’s done a good job in creating the MPC, resulting in stable inflation and a stable currency, but his tax policies have done nothing to stabilise housing and pensions.

Now that consumption is set to fall and unemployment rise the public mood will turn against Gordon (and be fuelled by resentment at his failure to take on Blair).

Which brings us to the MPC and the rate rise. To my mind, having to hold interest rates would be the bad news rather than raising them. If the MPC has to keep ‘real’ interest rates below the historical norm it means the economy can only get by on stimulants – a binge-borrowing junkie hooked on low rates.

Well we’ll get a feel for how the withdrawal symptoms are going with the Jan. trade figures on Wednesday and construction orders on Thursday; the same day as the MPC decision.

My guess is the MPC will wait until April for a move. The next US rate rise will come on March 22nd. We’ll see the UK CPI figure for February on March 23rd (a ‘normal’ figure, not distorted by the January sales). With luck, a bit of Spring sunshine should take away the pain of a quarter-point rise in April.

Posted by: David Sandiford at March 6, 2005 11:32 AM

Not sure if i trust the CPI yet, the changes from RPI-x are too significant to be ignored, and the reason's for its introduction were simply too weak. (See the Treasury's 'remit to the MPC and the new inflation target', december 2003 or the ONS's 'the new inflation target). The measures should be converging, though there's little evidence of this - over a year later.

Fundamentally, i don't think its possible for everyone to instantaneously shift their notion of what inflation actually IS upon its redefinition. Though the MPC still look at all 3 measures, my savings didn't feel particularly well defended a couple of months ago - when RPI hit 3.6% and the CPI hardly battered an eyelid. Despite the former target rate RPI-x still being in the safe -zone bracket - Mr. King wasn't unimaginably far off from writing an explanatory note to Gordon.

Maybe the measures will converge, but there needs to be some kind of change, CPI means nothing to all that is 'index linked'. My answer, simple: re-instatement of the RPI-x

Posted by: Albert at March 6, 2005 12:20 PM

Last week we were led to ask the question, what is growth? This week we’re asking ourselves what is inflation? The way Bush and Blair are behaving we’re being forced to ask the questions what is democracy and even what is freedom? We used to think an array of checks and balances kept all these things well within our comfort zone. Now we’re not so comfortable.

The shadow MPC just voted 1-5-3 for an interest rate cut-stick-raise respectively.

The point is that people see that things need to be done about various problems beyond the basic issue of inflation. Gordon Brown should be tackling these problems (excessive borrowing, the house price bubble and the trade deficit) but he’s doing nothing.

Just as in Australia, the central bank is going to have to manage the whole economy, not just inflation, at a time when the economy is becoming unstable. The MPC members had better reach for their tin hats.

Posted by: David Sandiford at March 7, 2005 03:49 AM
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