Sunday, September 25, 2005
Brown faces up to reality
Posted by David Smith at 10:59 AM
Category: David Smith's other articles

For years Gordon Brown's proudest boast has been that while others have criticised his growth forecasts, he has ended up having the last laugh. That boast, which was not always true, is sounding hollow this weekend.

With economic forecasters queuing up to slash their predictions, the chancellor bowed to the inevitable in Washington yesterday rather than wait for his pre-budget report in November. Growth will be below 2.5%, rather than the 3% to 3.5% he confidently predicted ahead of the election. There may be more downward revisions to come.

Does it matter? On Thursday, Brown had dinner with Alan Greenspan, soon to step down as chairman of the Fed, America’s central bank. Both have reason to be concerned about their legacy.

Brown’s political fortunes have gone up and down with the performance of the economy. The iron chancellor of the early years was unassailable; as powerful as the prime minister. But when, three years ago, he was forced to concede that public finances had gone off track, the political vultures began to circle.

There was talk of alternative successors to Blair, such as David Blunkett and Alan Milburn. That talk has now gone away, but a shaky economy could bring it back. Unemployment has been rising for the past six months, the first time this has happened since the early 1990s.

According to the chancellor, Britain has been hit by a temporary growth blip, resulting from two problems — rising oil prices and Europe’s soggy economic growth.

He may be missing his target, in other words, but it is not his fault.

Most economists do not, however, accept this explanation. “The causes run much deeper,” said Howard Archer of Global Insight.

“High oil prices are not the the key factor behind the marked slowdown in consumer spending. Higher debt levels, house prices, a marked slowdown in income growth and increased council tax bills have all been factors, while consumer confidence has been hit by concerns about the economic outlook and jobs.”

That is Brown’s headache. Since 1997, Britain’s economy has been kept going by consumers. In every year, consumer spending has grown at a faster rate than the economy on the back of falling unemployment, a rise in household debt to a record £1,100 billion and a near trebling of house prices. In contrast to their European counterparts, the British have been spending their hearts out for Britain.

That has changed. This year, say retailers, the credit cards are getting less exposure. Business bodies compete to out-gloom one another; some say sales are their worst since the early 1990s, others that you have to go back until well into the 1980s for times as bad as this.

The absence of the feelgood factor is important, and not just for retailers’ profits. The virtuous circle of rapid, consumer-led growth and falling unemployment, making possible a big increase in public spending, is in danger of being replaced by an era of slow growth, rising unemployment and unaffordable spending plans.

The other potential drivers of the economy, investment and exports, are sputtering.

David Willetts, the shadow trade and industry spokesman, points out that official figures show business investment at its weakest since records began in 1965. The poor performance of exports is underlined by a record trade gap, running at £60 billion a year. The Brown economy looks dangerously dependent on public spending and the now reluctant consumer.

This is an important moment for him.

Kenneth Clarke, his Tory predecessor, now challenging for his party’s leadership, senses the chancellor’s vulnerability. Clarke, who has always been stung by Brown’s claim of an economic miracle, pointing out that the record 52-quarter run of growth began under him, thinks the chickens are coming home to roost.

“What I’m saying is that I did all the spadework, and that my four years were better than the eight years since,” he will say in a BBC Panorama programme tonight, which questions Brown’s record.

That is also the view of most independent financial experts. If they are right and he is wrong about public finances, he will have no choice but to raise taxes or cut public spending.

Neither is an attractive option for a politician who has waited so long, with barely concealed impatience, for the top job.

Adapted from The Sunday Times, September 25 2005

Comments

as gordons speech 27/9 on about history lets not forget that history repeates its self bust & boom games how is he going to pull the wool over our eyes with the economy sliding down aslippery slope i rememder a old cartoon i saw of a donkey carring full laden of tax sacks on its back saying " take a little off
me " and boy do we need it the tax burden you say finishes in june or so i feel it finishes in october 31st!your book of free lunch is brilliant i see gordon endorsed it too ! would he endorse
it today after fiddling his sums ?

Posted by: john musty at September 27, 2005 09:10 AM