Sunday, March 19, 2006
Steady on the surface hides turmoil below
Posted by David Smith at 11:00 AM
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Something is missing. It may have been an unusually cold spring but the daffodils are sprouting, so that’s not it. I can’t say I have heard a cuckoo but then I rarely do.

No, what’s missing is the usual frenzy of pre-budget stories. True, we have some today but then the big day is on Wednesday. Normally by now we would have had weeks of it.

The late Lord Whitelaw once remarked pithily that Harold Wilson was going around the country stirring up apathy. The Treasury appears to have adopted a similar strategy for this week’s budget.

Three months on from the pre-budget report there isn’t much new to say on the economy or the public finances, officials say. In December Gordon Brown was up against it, being forced to revise his growth forecasts down and his borrowing numbers up. But the new figures, for 2% to 2.5% growth this year, and £34 billion of net borrowing (2006-7), look fine.

The chancellor is not yet ready, either, to set in stone his new, tougher public-spending guidelines from 2008 onwards. Having extended the next comprehensive spending review until 2007, he has another 12 months to think about it.

So, while he may surprise and dazzle us, it looks from here like a stocktaking exercise, the annual report of a golf-club treasurer to members, allowing Brown to get on with his “renaissance man” agenda of demonstrating how ready for No 10 he is.

Of course, budgets are never completely quiet. By tradition the leader of the opposition responds and Brown will be keen to show he can make mincemeat of David Cameron, unlike his gentlemanly neighbour.

As for the nitty-gritty, there will be announcements under the heading “meeting the productivity challenge”, including measures to boost skills, encourage business to spend more on research and development and action on deregulation. None of this, however, is likely to set the world alight. Perhaps this is as it should be. We have all complained on plenty of occasions about this chancellor’s excessive tinkering. Shouldn’t we welcome a “steady as she goes” budget?

That would be fine, except that there are urgent matters requiring attention. Nobody would be more surprised than the CBI if Brown announced he was cutting business taxes by £5 billion, which is its demand. But it makes the point that the tax regime for companies has become significantly less competitive under this chancellor.

In 1997 Britain ranked among the lowest OECD (Organisation for Economic Co-operation and Development) countries for business tax. Now we are moving inexorably towards the top. New business taxes add up to a cumulative £50 billion, the CBI says. By 2010 the figure will be £80 billion.

The 100 Group of Britain’s biggest companies says corporation tax accounts for only half of the taxes paid by business. Add them all up and the total tax contribution rate of large firms is over 50% and rising.

There is a debate about whether business investment is as weak as official figures suggest — a record low as a proportion of gross domestic product. The Office for National Statistics is working on new data to include software investment.

But there is little doubt investment is far weaker than it should be. Higher business taxes are one reason. Even more pressing are pensions. Employer contributions to company schemes are 1.1% of GDP, or £13 billion higher than in 1997. Firms are funding the Pension Protection Fund, which will cost up to £775m in 2006-7.

The really crazy thing about pensions, however, is the catch-22 which funds find themselves in. Contrary to normal investment practice, they are required to buy assets (long-dated government bonds, including index-linked gilts) that are both low-yielding and offer little prospect of significant capital growth, because that is what the regulatory environment forces them to do. Pension-fund deficits, meanwhile, ratchet steadily higher.

This situation, described as a “debacle” and “a serious misallocation of resources occurring on a massive scale” by Sir Martin Jacomb, former chairman of Prudential, should be the subject of urgent discussions between ministers and the pensions industry. Instead the indications are that the only thing worthy of note this week will be the chancellor’s announcement of the so-called funding remit, the amount of gilts to be issued by the Debt Management Office in the coming year.

Willem Buiter, a former member of the Bank of England’s monetary policy committee, has called on the chancellor to flood the market with long-dated conventional and index-linked gilts to get yields higher, until the market cries “uncle”. The National Association of Pension Funds wants an extra £100 billion of issuance.

Both are likely to be disappointed. Michael Saunders of Citigroup expects £70 billion of gross gilt issuance for the 2006-7 fiscal year, two-thirds of it in conventional long-dated (£28 billion) and index-linked (£17.5 billion) gilts. Last week’s rap over the knuckles from the Parliamentary Ombudsman means the government is not about to relax the regulatory regime that has got pension funds into this mess. The debacle has further to run.

So, sadly, has the debacle over public-service delivery. The CBI points out that the fall of four percentage points in the business investment share of GDP since 1997 is exactly matched by the rise in government current spending. “Crowding out” — the displacement of the private sector by the public sector — does not usually happen as neatly as this, and this may or may not be a perfect demonstration of it. But it certainly makes you think.

This should be a time, in the lull before the next spending review, when the Treasury is going around Whitehall departments forcing efficiency improvements in readiness for the thinner financial gruel on the way. We should be hearing, this far into the great expansion, about innovative ways in which public services are being delivered.

But it isn’t happening. Sir Nigel Crisp is on his way out of the NHS, leaving financial deficits behind. The Treasury’s reduction in civil-service numbers is a will o’the wisp. On any reasonable measure, public-sector productivity is declining.

Is this a good backdrop for a budget that offers mere stocktaking? I don’t think so.

PS: Whatever the chancellor has in store for gas guzzlers on Wednesday, and there are rumours of an increase in road tax, I am tempted to go out and buy the biggest, meanest 4x4 offroader I can find. The reason? A century after they were first introduced in New Jersey, and two years after a Greater London Assembly report which urged councils to use an array of methods to control traffic speed, my local authority has just discovered speed bumps.

Mind you, the ingenuity of the people who run the road network when it comes to slowing traffic knows no bounds. I have mentioned before the epidemic of barely necessary roadworks, everything from tarting up pavements to replacing bollards, and the economic explanation for it — road maintenance spending now counts as government investment so is welcomed by the Treasury.

If I were to develop a new economic indicator, the fluorescent jacket index, it would suggest the economy is booming. Booming so much, in fact, that there is apparently no time to coordinate these things; last week both the main arteries from Kent into London, the A2 and A20, were reduced to a single lane. I suspect, however, that such an indicator would tell us something else; this government’s ability to throw money away on superficial things, leaving the really serious shortcomings untouched.

From The Sunday Times, March 19 2006

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