Sunday, February 17, 2008
Darling needs to dig deep to escape the mire
Posted by David Smith at 09:00 AM
Category: David Smith's other articles

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These are dark days in the Treasury. Last October's hasty and openly political pre-budget report is unravelling faster than one of your granny's scarves, Northern Rock sits like a great fat cuckoo in the nest, and officials are praying that figures this week will bring some relief from the string of awful releases on the state of the public finances.

For years, the Treasury was famous for attracting fine minds in bad suits, happy to work in its austere, maze-like, red-lino floored building. Now it has modern, airy, high-tech headquarters that would not be out of place in a dotcom firm. The dress code is casual. But the Treasury's reputation has rarely been lower. Even the political columnist of the Financial Times, usually a friend of the department, is calling for its break-up.

Are the Treasury's problems simply down to the fact that Alistair Darling, so far at least, turned out to be a surprisingly accident-prone, unintentionally headline-grabbing chancellor?

I shall return to him in a moment. The Treasury's difficulties, however, were in all important respects created during the 10 years that Gordon Brown was chancellor.

From the moment Brown and his aides walked into the Treasury in May 1997 and started handing out orders, it was clear that the relationship between ministers and officials would be different from ever before. Margaret Thatcher liked to distinguish between people who were "one of us" and those who were not, but her chancellors worked well with the Treasury they inherited.

Under Brown the wave of departures among officials started from the very top and continued. As the old Treasury left, so the politicisation of the new Treasury gathered pace. When Ed Balls, Brown's Labour party aide, now a minister, was appointed chief economic adviser, normally a post for a civil servant, that process was set in stone.

There are two reasons why all this is relevant now. The first is that, so much was the post-1997 Treasury geared around Brown that when he eventually moved on (taking a string of officials with him) it was left like a ship without a rudder; Hamlet without the prince.

The second was that officials lost the "Yes, Minister" ability to say "No". Opposition to policies would be construed as opposing the Brown-Balls project and thus disloyalty. This reached its nadir with last October's pre-budget report, essentially a party-political broadcast dressed up as a Treasury statement, and with damaging consequences. Somebody should have said no.

So is there anything Darling can do to claw back his own, and the Treasury's, reputation? It's a tough job but somebody has to do it, so let me try.

His first task is to try to undo some of the damage caused by his efforts so far. Let us be clear, there is a case for making "non-doms" pay some tax, even 30,000 a year, just as there was a case for simplifying an overcomplicated capital-gains-tax (CGT) regime. There was no case, however, for rushing through changes to either, particularly taxation of non-doms, over which Brown fretted for years. If it was easy, then even Brown, who takes his time to come to decisions, would have acted.

My sense is that on both CGT and non-doms, Darling has made as many concessions as he intends, and both will be pushed through in the March 12 budget. But there is a powerful case for further consultation, if necessary putting the changes on ice for 12 months, as groups like the Institute of Directors have said.

Second, the chancellor should review, and if necessary rewrite, the fiscal rules. This is not a time for tax hikes it rarely is and the inclusion of Northern Rock debt on the government's books has already temporarily bust one of the fiscal rules that debt should stay below 40% of gross domestic product.

But the golden rule, which means in effect that the government should only borrow to invest, has proved itself to be unsuitable, allowing too much borrowing during the good times and leaving the public finances vulnerable during a downturn.

It has meant that while most other countries have been reducing their budget deficits, Britain's has been rising. The rule means that the norm for public borrowing is more than 2% of GDP, currently in excess of 30 billion and rising to 40 billion. That is too high.

As I say, this is not the time for immediate radical fiscal action, but Darling would do himself and the Treasury a lot of good if he announced that, over time, the intention is to move to a tougher fiscal rule, with a borrowing norm of no more than 1% of GDP and even smaller increases in government spending than the 2% annual real rises that are being planned at present. Third, the Treasury has to get Northern Rock off its hands. We will know more this week but it would be a terrible mistake if nationalisation was left as the only option because of government insistence on driving a hard bargain. That drove Olivant away and it could yet see off Virgin's bid. Whatever Vince Cable says, it is far better that somebody makes money out of rescuing it than that the dead hand of nationalisation makes an unwelcome comeback.

Finally, if Darling wants to make himself really popular with business he should do something about a problem that is as big a burden as rising taxes and, for a government strapped for cash as this one, cheaper to tackle.

The British Chambers of Commerce will say this week that the cumulative burden of red tape on business under this government has reached 66 billion, and is rising by 10 billion a year. Brown promised to tackle this and the Department of Trade and Industry was deliberately renamed the Department for Business, Enterprise and Regulatory Reform.

But the BCC's exercise shows that the tide of red tape continues and that examples of reductions are as rare as hen's teeth. George Osborne, the shadow chancellor, proposes an Office for Tax Simplification. If Darling were to apply his lawyerly brain to doing something meaningful in this area, he could do a lot of good. He could, indeed, yet turn out to be a good chancellor.

PS: For a man who expects to write a second letter in the coming months explaining why inflation has risen above 3%, at a time when the economy is slowing sharply, Mervyn King was surprisingly upbeat last week in presenting the Bank of England's quarterly inflation report.

The governor thinks a slowdown that will take growth significantly below 2% during this year is a necessary purgative and part of the rebalancing of the economy towards exports that the Bank has long been looking for. He and his colleagues on the monetary policy committee (MPC) are even relaxed about the fact that sterling fell towards the end of last year, this being part of the rebalancing process.

The rise in inflation will be temporary, and won't preclude another cut or two in Bank rate. By next year, growth will be picking up and inflation heading back towards target. King, who has occasionally sent shudders through the housing market in the past, was also reassuring on this score, expecting a prolonged period of flat prices rather than big falls. Given that this is also my view, I rather liked that one.

You could say that the Bank is talking its own book, and ignoring a worrying rise in both inflation and inflation expectations. You could say that even the new gloomier forecast for growth is insufficiently downbeat. King countered by saying that City economists may be overstating the gloom because the firms they work for are in the eye of the credit storm. The further you go away from London, the more upbeat people are.

Actually, I am also feeling upbeat. It may be just the fact that we have had springlike days in February. More likely it is because I can report, after a long fallow period, a sighting of a skip in my street.

One skip doesn't make a summer but it's a start.

From The Sunday Times, February 17 2008