Sunday, December 03, 2006
Brown packs his bags for the long haul
Posted by David Smith at 11:00 AM
Category: David Smith's other articles

It may not mean much to you, but for me Wednesday will mark the end of an era. The big one will come in March, with Gordon Brown’s last budget. But this week will see a mini swan song — his last pre-budget report.

You may say I am assuming too much. Unexpected things happen, as we saw last week with the sad news that the chancellor’s young son has been diagnosed with cystic fibrosis. It could be that this time next year John Reid will be occupying the premiership. That, however, looks about as likely as Watford winning the Premiership.

It could even be that in a year’s time the youthful Ed Balls, Sancho Panza to Brown’s Don Quixote, is in charge at No11. As economic secretary to the Treasury he has been getting more coverage than is decent for a junior minister.

So it looks like Brown’s last pre-budget report. He has been set up nicely for it by an Ipsos-Mori poll of 283 members of the Political Studies Association, university academics, who rated him the most successful chancellor of the post-war era.

I got enough flak from readers for placing him second to Geoffrey Howe in my own ranking of chancellors, which I shall revisit when Brown steps down. But I think I can see where this poll is coming from. Stafford “austerity” Cripps is ranked second and Roy Jenkins, another Labour chancellor, fourth. Both presided over sterling devaluations.

Labour’s Hugh Dalton, who had to resign in 1947 after leaking his own budget, is fifth. Ken Clarke is the highest-ranked Tory, third, while Howe is way down in 11th place. I sense a bit of a Labour bias.

One area where Brown is head and shoulders above the rest is in raising the Treasury’s document output. Previous chancellors did not have pre-budget reports, although some had autumn statements. They were terse.

Not this chancellor. Last year’s pre-budget report came with 1,230 pages of documentation, according to my calculations. If you’re a slow reader, and embarked on it at this time last year, you might just be finishing by now. Marvellous.

This year promises to put that in the shade. As well as the pre-budget report and the accompanying technical documents, a string of important independent reviews is promised, including Lord Leitch’s review of skills and Kate Barker’s report on land-use planning. Such is the danger of overcrowding that the Treasury has published some reviews already, notably Sir Rod Eddington’s transport study on Friday.

What will the pre-budget report be all about, as Brown readies himself to say goodbye to all this? In the Treasury there is quiet satisfaction that this year it will not be an economic mopping-up exercise. Some of the chancellor’s previous pre-budget reports have not been glorious triumphs, when he has had to admit his borrowing forecasts have gone awry.

But this year, thanks to healthy tax receipts, the pressure is off. The Treasury’s budget forecast was for public-sector net borrowing of £36 billion. Independent forecasters predict something closer to £38 billion. In this case, and perhaps only in this case, a couple of billion is neither here nor there.

True, the borrowing figures could have been better, given that the economy should grow by between 2.5% and 3% this year, compared with the 2% to 2.5% predicted in the March budget. Better-than-expected growth is another reason why the Treasury is relaxed. The pound is strong.

So this is a transitional pre-budget report in more ways than one. It marks the beginning of the transition from 10 years of Tony Blair to 10 years of you know who — at least if it all goes according to plan.

Last week, the Treasury published a document looking at the long-term challenges facing Britain, including a 38% rise in the number of over-85s in the next 10 years; the rise of China and India so that by 2017 they will be bigger in economic terms than Britain, France and Germany combined; and rapid technological changes in the way we work and communicate.

The challenges include, of course, terrorism, poverty, climate change and the pressure on natural resources. Interestingly, the Treasury document talked about the risk of an increase in global temperatures of up to 6C by the end of the century, while the Stern review of climate change it commissioned said there was a 50-50 chance that temperatures would rise by more than 5C.

Even so, with global population set to rise to between 8 billion and 10 billion by 2050, and global per capita income growing by two to four times over the same period, there is a challenge there.

So Brown’s last pre-budget report will start to press some of the buttons, and he will carry on pressing them in the March budget and next year’s comprehensive spending review. The need to compete against a surging China and India means we need a higher level of skills, hence the Leitch review, which will say that in the future there will be no place in Britain for unskilled workers.

Improving the supply-side of the economy was at the heart of the Eddington and Barker reviews, both of which argue that Britain’s planning laws are holding back the economy. In the case of transport, planning restrictions mean big projects cannot be delivered in a timely way. For housing, it means not only high prices but an inability to put new homes where workers want to live.

The chancellor will also press a few buttons on climate change, not just with easy targets like air passenger duty, but also with what will be presented as the government’s biggest-ever energy efficiency drive. Brown has never been all that green but he is determined to make up for that.

The overall aim is to show that he has raised his sights beyond short-term economic worries to the distant horizon. A lot of water will flow under the bridge over the next 10 years. He, however, intends to be still standing on it.

PS: Will the next move in Bank rate be down? The Organisation for Economic Co-operation and Development, in its twice-yearly economic outlook, said the case for further rate rises was “not compelling”, largely because wage settlements have remained low. It predicts that the rate will average 5% throughout next year before edging down to 4.75% in 2008.

Rachel Lomax, the Bank of England’s deputy governor of monetary policy, joined fellow monetary policy committee member David Blanchflower in opposing last month’s rise. In a speech last week she said the rise in inflation had been modest and growth in pay was benign. She had been prepared to back an “insurance” rise in Bank rate in August but not another in November. But three of her colleagues — Charlie Bean, Sir John Gieve and Tim Besley — remain worried about inflation risks.

The shadow monetary policy committee (SMPC), which meets under the auspices of the Institute of Economic Affairs, has also been deliberating and has come up with a shock verdict. Seven of its members say Bank rate should stay at 5% this month but two vote for a quarter-point hike. And one of those two is Roger Bootle, economic adviser to Deloitte, usually thought of as the most dovish of doves. He wants a hike to clamp down on inflationary expectations, while Andrew Lilico of Europe Economics backs an increase because the broad measure of the money supply is growing at 14%.

Beyond these two, there is a “bias to tighten” on the SMPC, with John Greenwood of Amvescap, Ruth Lea of the Centre for Policy Studies, Gordon Pepper of Lombard Street Research and David B Smith of Derby university all leaning that way, some strongly. Patrick Minford of Cardiff Business School, though, thinks the Bank should prepare for a cut. Kent Matthews, also of Cardiff, is neutral, while Peter Warburton of Economic Perspectives thinks events will force the Bank to cut.

One thing is clear. The independent Bank has never raised rates in December and won’t start now. I think 5% probably is the peak. Housing, however, is still racing away, with prices up 1.4% last month and mortgage approvals at a three-year high. Let’s see if the winter brings modest pay settlements and a cooler housing market. And let’s see if it brings a sustained $2 pound.

From The Sunday Times, December 3 2006

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