Sunday, March 20, 2005
No swansong, more a damp squib
Posted by David Smith at 11:00 AM
Category: David Smith's other articles

WAS that it? After nearly eight years in the job and nine budgets, has our longest-serving chancellor bid us adieu with a budget that was definitely not a bang, and only just qualified as a whimper?

True, not all budgets are memorable, and most of Gordon Brown’s have been forgettable. For somebody who has had an enormous influence on British politics and has put the Treasury at the heart of running the government’s domestic agenda, some of his set pieces have disappointed.

Thus, the only budget that stands out in this parliament was in March 2002, when employee and employer national insurance contributions were raised and income-tax thresholds frozen to fund an £8 billion injection into the NHS.

Most of the budgets in Labour’s first term, similarly, will not merit much attention when history books are written. The exception was Brown’s first in July 1997, when he announced a £5.2 billion windfall tax on privatised utilities and the abolition of the dividend tax credit — the infamous £5 billion annual raid on pensions.

One other budget, in March 2000, was intended to be the chancellor’s big showcase, the moment when he announced a shift from a squeeze on public spending to a splurge, most particularly on health but also education and other public services. Unfortunately, Tony Blair, in the cauldron of a Sunday-morning interview on Breakfast with Frost, had given the game away two months earlier. That episode added another page to the chancellor’s catalogue of grievances.

Even if the budgets have not been that memorable, some of the individual measures have. So we have had the introduction of Brown’s beloved tax credits for families, children and pensioners. A 10% reduced rate of income tax has been introduced; mortgage tax relief and the married couple’s allowance have disappeared; and there was even a cut in the basic rate of income tax from 23% to 22%. But over the years stamp duty has gone up from 1% to a maximum of 4% and individual taxpayers have been hit with a series of other hikes.

For companies looking back on the Brown era, corporation tax has been reduced from 33% to 30% (with a minimum rate of 10%). Company-car taxation has increased. And businesses know that what this chancellor has given with one hand he has more than taken away with the other.

Not only was Wednesday’s budget less than eye-catching as an economic event — the net fiscal tightening of £0.3 billion compared with a giveaway of £3.6 billion in March 2001, just ahead of that general election — but there were few individual tax measures of significance. After eight years, either Brown has run out of ideas or he has decided that he has tinkered enough.

That is no bad thing. Having complained often enough that this chancellor has given us a horrendously complicated tax system, it would be ungracious to attack him for doing very little.

And the Treasury, to its credit, kept its word. It said beforehand that there would be no net giveaway in the budget, and there was indeed no net giveaway. The City had expected more and so had Westminster. But this was a tight budget.

The fact that it was so tight is not just reflected in the narrow margin Brown has left himself to meet his golden rule, just £6 billion in a £1,200 billion economy, but also in the measures to which the Treasury had to resort in order to have the money for a few political backhanders.

So commercial stamp-duty relief in disadvantaged areas, hailed by Brown in his 2001 budget as needed to bring enterprise to run-down places and speed up their regeneration, has been abolished to save £340m. Oil companies, meanwhile, will pay an extra £1.1 billion this year because of timing changes in their North Sea tax payments. The chancellor is taking some of tomorrow’s taxes to pay for today’s spending. Pensioners, the main budget beneficiaries, have votes. Oil companies don’t.

The underlying economic reality is that, even if he meets his golden rule in this cycle, he will be starting the next cycle with borrowing too high. The Institute for Fiscal Studies still believes he will need higher taxes or spending cuts of about £11 billion to be sure of meeting the rule.

Will it be Brown or somebody else who has to make that painful decision? My reading of Brown’s body language is that, while he would hate with a vengeance being moved to the Foreign Office should Labour be re-elected, he has positioned himself in such a way that it would not be seen as a huge snub.

The Centre for Economics and Business Research (CEBR), taking the sensible view that Brown’s future depends on the size of the Labour majority, has tried to work out the probability of Brown remaining chancellor. If the majority is big, Blair will feel emboldened to move him. If it is small, or there is a hung parliament, Blair might step aside. Brown stays at the Treasury, according to the CEBR, if Labour’s majority is between 15 and 90 seats, and it calculates there is a 29% chance of that happening.

All good fun, even if things are never as precise as that. My view is that Blair will think very carefully about moving Brown, not just for fear of a political backlash from the chancellor’s supporters, but also because of the danger of breaking the economic spell.

Brown’s doggedness is reflected in the economy’s performance. They used to ask what would happen if Margaret Thatcher fell under a bus, the answer being that the bus wouldn’t dare. What would happen if the economy went into recession under Brown? After the longest run of growth since 1701, it wouldn’t dare.

PS: The message from the Office for National Statistics to the Bank of England’s monetary policy committee (MPC) could not have been clearer. “Retail sales in decline,” it headed Thursday’s release, which showed sales in the December-February period down by 0.6% on the previous three months.

The retail-sales figures, along with benign, average-earnings data, with growth remaining below the key 4.5% rate, argue against an early interest-rate hike. The chancellor’s budget, by eschewing any giveaway, provided no provocation for the MPC. Putting money into pensioners’ pockets does not lead to the kind of runaway spending the Bank would be worried about. Raising the stamp-duty threshold from £60,000 to £120,000 is not going to produce a new housing boom.

So where does that leave us on interest rates? April, I would say, is out of the question. Not enough has changed to merit a rate rise. Even a May hike, just a few days after the general election, would be mighty hard to justify unless evidence quickly emerges of sharply rising economic activity and inflation.

My view has been that the base rate should have peaked at 4.75% and, indeed, will be shown to have done so in the coming months.

From The Sunday Times, March 20 2005

Comments

I think Labour and the media are underestimating the anger felt by OAPs at their treatment in the budget. This is the one group in society that does not think being deceitful is clever. As the facts emerged about the penny-pinching nature of the bus pass and the crude bribery of the one-off council tax bung it was increasingly clear that Gordon Brown’s budget speech was just as deceitful as the dodgy dossier.

If it’s governments that lose elections, this one is certainly giving it a good shot.

Posted by: David Sandiford at March 21, 2005 02:11 AM

“Retail sales in decline”

Surely the point here is that they’re supposed to. It’s not that retail sales are declining from a ‘normal’ level but from an excessive level funded by borrowed money.

Retailers and manufacturers won’t like it but retailers should cut costs and manufacturers should get out more and export. It’s not as though they don’t know a decline in consumer spending is coming.

The US Fed. will raise rates this week and the MPC should do the same in April - to cut borrowing and encourage saving. There’s no point in having an Indian summer for borrowers at this stage.

We’ll see the CPI figures for Feb. this week and the MEW figures and Current Account figures for 2004 Q4. Let’s hope they don’t give consumers a false sense of security.

Posted by: David Sandiford at March 21, 2005 02:46 AM

manufacturers should get out more and export

What? and compete with China India and Eastern Europe - thats what Germany is doing rather unsucessfully.

It's service providers that need to get out and export if standards of living are to be maintained.

Posted by: giles at March 22, 2005 06:38 PM

I was really thinking of manufacturers’ survival rather than the good of the economy – as UK manufacturers won’t have a binging home consumer to depend on any more.

But the point about service providers is spot on – a point President Chirac seems well aware of. This was the week the EU was supposed to fling open the door of service sector competition, only for Chirac to put his foot behind it.

Mind you, given the state of the UK education system and the British genetic inability to learn a foreign language the chances of Britain exporting services to Europe are probably pretty slim anyway.

There’s been lots of interesting economic news this week.

I’m not impressed by the Feb. inflation figures being unchanged from Jan. It looks as though retailers couldn’t shift their stock in the Jan. sales and had to keep sales prices through to Feb. But those price reductions will be removed in March – especially for furniture.

Even so, it looks as though any interest rate rise will be delayed until May – in spite of the US rate rise and two members of the MPC voting for a rise in March. The very interesting BoE Agents’ Summary of Business Conditions for March is here:
http://www.bankofengland.co.uk/agencies/agsum05mar.pdf

The current account figures came out looking respectable on the surface. But the positive investment income just masked the terrible trade deficit. Maybe we really should all become a nation of day-traders.

Or hamster breeders – the changes to the inflation index constituents were amazing. Chiropractors are in - but not a session at the nail-painting salon (the last chance salon). It can only be a matter of time. This is what we’re coming to.

Posted by: David Sandiford at March 24, 2005 07:58 AM