Sunday, March 26, 2006
Budget tall tales about UK competitiveness
Posted by David Smith at 11:00 AM
Category: David Smith's other articles

I don’t know whether Gordon Brown is an analogue politician in a digital age, as David Cameron suggested, but technology has certainly changed budgets.

In the old days the chancellor did not stand up until 3.30 and sat down an hour or so later. The daily papers had a mad scramble to get everything in their first editions and City analysts stayed up all night to get their budget assessments on clients’ desks by the start of business the following morning.

Now we’re all electronic. My first assessment was on The Times/Sunday Times website in a couple of hours. The brokers’ and accountants’ notes were e-mailed out by tea-time.

So I’m not going to go over all that again. The chancellor’s forecasting triumph was to not have to revise the projections he made three months ago, give or take a couple of billion here and there added to the current account and budget deficits. So growth of 2% to 2.5% this year, 2.75% to 3.25% next, the latter driven by exports and investment. I’ve heard that before.

Brown also confirmed that he is an instinctive spender, not a tax-cutter and, in particular, that he wants to raise state spending per pupil, currently £5,000, to the level - £8,000 - currently available to independent school pupils And all that within a spending review, to be concluded next year, that already promises to be eyewatering tight, and will see the post-Brown Treasury cutting its own spending by 5% a year.

What I want to focus on, instead, is a question fundamental to the future. Is Britain becoming more competitive, catching up with or overtaking rival economies, as the Treasury claims? Or has Britain fallen behind, higher taxes and the re-regulation of the economy undermining our ability to compete, as many businesses believe?

This is not as straightforward to answer as you might think. Take, for example, business investment. On the face of it this is a disaster area, running at its lowest ever share of gross domestic product in cash terms and the one area where Brown was forced to revise his December forecast for the economy. Business investment is now expected to rise by just 1% to 1.5% this year, down from the earlier 3%-plus forecast.

The Treasury also points out, however, that in real terms business investment has risen relative to GDP, that firms spend more than £20 billion a year on software, and that the UK has the highest IT spend, relative to GDP, of any major economy except America.

So is weak investment a problem or not? It’s a problem. Elsewhere in the jungle of documents the Treasury is honest enough to admit that French workers have 80% more capital equipment and those in Germany and America 50% more than in Britain.

What about productivity, surely the Achilles’ heel of the economy? Well no, according to the Treasury. Britain now has higher output per worker than Germany and Japan, has narrowed the gap with France and kept pace with productivity powerhouse America. Brown claimed productivity growth since 1997 has averaged 2.3%, compared with 2% in the previous cycle under the Tories.

Well, no. The Brown figure is simply wrong. Output per worker, the best productivity measure, has grown by an average of just 1.6% a year since 1997. The apparent success relative to other countries is mainly a statistical illusion, explained by data revisions. It is quite wrong to say, for example, that productivity growth in Britain has matched America.

These things can be debated. The Treasury, naturally, highlights the good news, even at the expense of drifting into government propaganda. Critics, equally, focus on the many shortcomings that remain.

But I think we’re right to criticise. Buried in the budget document was a section on “creating an enterprise culture” It started: “Enterprise culture encourages positive attitudes towards entrepreneurship and risk. A more enterprising culture can only be achieved through widespread engagement by individuals and organisations across the UK.”

Not only is the English questionable, but it was clearly being written by somebody who wouldn’t know an enterprise culture if it bit him in the leg. Brown’s Treasury has become an all-embracing “real economy” department but its ministers and officials have little idea how business works. Giving schoolchildren “enterprise education” might help at the margin, but I suspect the future Bransons will decide those are classes they can safely skip.

Meanwhile, real businesses have to cope with the most complex tax system in Britain’s history - according to Tolley’s Yellow Tax Book Brown has added 3,500 pages, or 1m words, to UK tax legislation in five years - and struggle to compete.

Speaking of competitiveness, the Treasury was mightily provoked by our story last week that taxes are about to hit an all-time high as a percentage of gross domestic product, higher even than when Denis Healey was making the pips squeak (though he denies he ever said that) in the 1970s. The figures, for the tax burden excluding North Sea revenues, were based on an analysis of Treasury projections by Peter Spencer, chief economic adviser to the Ernst & Young Item club.

Nonsense, the Treasury said, you shouldn’t exclude North Sea taxes from the figures. If you include them, the tax burden is only the highest for two decades, since 1984-5. I happen to think leaving the North Sea out gives a pretty accurate picture of the burden faced by ordinary households and businesses but let us allow that one.

Taking the overall tax burden, however, one small adjustment is required. Tax credits have taken the place of social security payments as the preferred way to help families with children and other groups. They are welfare payments in another name, albeit payments that reach a lot higher up the income scale. Brown increased the child tax credit last week.

For a fair comparison with the past, you need to add tax credits back in. That takes the burden up to 39% of GDP in two years’ time, above the 1984-5 peak of 38.9%. Either way, we’re about to be taxed more than ever.

PS What a week for the Bank of England and its monetary policy committee(MPC). First the chancellor announces he is replacing Steve Nickell with David “Danny” Blanchflower, replacing one professor specialising in labour market economics with another. Nickell, I think, taught Blanchflower, who then pursued his academic career in America, at Dartmouth College, and had some robust views on the need to pay academics in Britain adequately. Younger readers may not know the “Danny” comes from the legendary footballer who captained Spurs’ double-winning side in 1961.

Then, Richard Lambert, the former Financial Times’ editor, left the committee abruptly, having been offered a second three-year term by Brown, preferring instead to become CBI director-general.

This may have been, and I hate to use this expression, a “no-brainer”. The CBI will pay Lambert £300,000 a year, more than twice the £149,314 annual salary of an MPC member.

There is, however, more to it than this, which raises the question of whether the MPC is losing its appeal. New external members are offered the job by the chancellor but the terms are fixed by Mervyn King, the governor. These days he insists they work no more than three days a week, and are paid pro rata, cutting the salary to below £90,000. That’s good by most people’s standards but means MPC members get a fraction of the salary of the City analysts who peruse their decisions.

As for what the changes in personnel might mean, the loss of Nickell, a noted dove, could shift the balance on the MPC. In practice, rates appear to be stuck at 4.5%, boringly, into the indefinite future. That may be another reason why the MPC is losing its appeal.

From The Sunday Times, March 26 2006

Comments

There does seem to be a "finger in the air" attitude towards forecasting in recent years, where optimistic foreacsts are trumpeted, and then "adjusted" downwards when reality creeps in, and just before they're held accountable for them.

I suppose a lot of economists are relying on peoples' short memories of their previous predictions. Personally, I can't remember any of last year's Big Brother contestant names, let alone Gordon Brown's 2006 growth prediction last year (some double-figure percentage no doubt).

I see his prediction for next year is much better though ... ;)

Posted by: Paul Owen at March 27, 2006 11:25 AM