Comments: The end of a record-breaking chancellorship

What a bland and benign article. Why not do as the Telegraph have done, and tell it like it really is?

http://www.telegraph.co.uk/opinion/main.jhtml?xml=/opinion/2007/02/16/do1601.xml

"Now, fast-forward to February 2007. Where are we? Answer: stuck in a horror movie, with the Chancellor chasing us, chopping away at our wealth and income, testing to destruction his predilection for saying one thing and doing another.

"Britain's productivity remains well below the average of other G7 countries (Canada, France, Germany, Italy, Japan and America). That's not surprising when you look at the scale of Brown's profligacy. Since 1997, more than one million jobs have been lost by British manufacturing. "

Posted by Eric at February 16, 2007 04:06 PM

Firstly, why don't you stop hiding behind stupid pseudonyms and non-existent e-mail addresses - Eric, or Fernando - or whatever your name is? I sense the return of an old stalker.

Secondly, the reason I wouldn't "tell it like it is" as the Telegraph did because what they are telling is rubbish. Britain has higher productivity than Germany, Japan and Italy but not the US and France, though the productivity gap in respect of them has narrowed since 1997. If you understood anything about productivity you'd know that the Telegraph's comments about jobs are a complete non sequitir. A reduction in the number of people employed boosts productivity - output per worker. That's why manufacturing productivity rose in the 1980s under Margaret Thatcher and why it has been rising strongly recently.

Posted by David Smith at February 16, 2007 04:28 PM

Well my email address is real, so please don't get cross at me, David.

The point about manufacturing is this - productivity has been rising very strongly, but output has not increased, unlike in every other G7 country. I fully accept that there is nothing inherently special about manufacturing, but it is more internationally exposed than most industries and gives you an idea of where we are headed in terms of our ability to be competitive. Financial services exports, despite a very favourable tax regime for the city from which other industries don't benefit, simply aren't replacing manufacturing exports, hence our huge (and growing) trade deficit.

I also think you are much too kind to Brown. There has been a low inflation environment internationally and inflation targetting and openness of interest rate decision making preceded Brown. We might also ask why we need higher interest rates than other countries to keep our inflation at a similar level - profligate government spending, perhaps? He also simply stuck to the Tories' spending plans for the first two years, so let's not give him too much credit for that either.

So what has he really achieved apart from rapidly deteriorating deficits and long term debts not included on the balance sheets? I am honestly at a loss to think of anything - I think he has thrown away many of our advantages and effectively borrowed to make the economy look good in the short to medium term to the detriment of the long term.

Posted by HJHJ at February 16, 2007 10:00 PM

That's a fair point. I come from a manufacturing part of the country (the Black Country) so have a concern for manufacturing. It is, however, a long time since we've had a government that has run a successful manufacturing strategy - sometimes you have to accept that a sector is in secular decline.

I think manufacturing, and some other export-exposed sectors, are victims of the flow of long-term capital into the UK. The balance of payments has to balance - so the consequence of those inflows has been a strong pound and, arguably, a necessary trade deficit. You can argue that the UK has been too open to long-term capital inflows, particularly foreign takeovers, but that is another story.

Brown's achievements? Under his watch every other major economy has had at least one recession but Britain hasn't come close. GDP per capita in the Uk has risen to the second highest in the G7 (after the US). You can say this is serendipity, and maybe it is. But we'd blame him if we'd had a couple of recessions and if UK GDP per capita was the lowest in the G7. Continuous growth, low unemployment and low inflation are easy to take for granted. They are, however, far from typical for the UK.

Posted by David Smith at February 16, 2007 10:30 PM

How you view Brown's record depends on how much of his own bluster you accept. David Smith's comments about the macro economics are fair enough but serendipidity has definitely helped Brown. For example, we avoided recession due to two incidental factors - private consumption levels on the back of a strongly rising property market and an inadvertent parallel huge increase in public spending on things like the NHS and all those very useful civil servants.

The question is whether that state spending represents value for money and produced real improvement in public services? In the case of the NHS, Brown threw the money around and what has been the outcome? A crazy deal; with doctors and consultants receiving a huge hike in incomes with a lowering of hours and their weekends free. Meanwhile A&E's close down left right and centre, hospital closures threaten and there are big Hospital Trust deficits all over the place.

The government can point to 6 new hospitals being built but only one of those is in the Tory south and all of them have been built at enormous long term cost under the dreaded PPFI regime. Private Finance Initiatives represent stealth expenditure on Brown's part in that strangely, they do not impinge on his Golden Rule since they are off the PSBR balance sheet. Include them and the Golden Rule suddenly looks rather brassy. Add the Railways' public subsidies and the Trillion+ unfunded and unreformed public sector pension liability and you can forget any 'golden' rule. Its term has in any event always been flexible - originally it started a couple of years inside Labour's rule to avoid giving the Tories any credit. Since then the term has been extended and shifted around to cover any contemporary economic embarrassment. Why did Brown shift from the RPI to the CPI? To bamboozle in a similar way.

When you study Brown's Chancellery you see a transition from black numbers - caution and sticking to Tory spending rules to red with gradual and deepening profligacy with the public finances. In political terms he has been like McCavitty when the going got rougher but at a price. Instead of challenging for Blair's premiership he has opted always to wait compliantly and his strategy of getting out of the Exchequer in time to blame his successor for the state of the economy will not now work.

Posted by Alan Tayler at February 18, 2007 07:39 AM

Dear David,

Never has a single man in power in brittain done so much to create his vision of a miracle economy. NO MORE BOOM AND BUSTis what wil haunt this man during his new tenure as PM.
tax and spend.....but now its payback time.
a perfect foundation has been laid for the mother of all recessions and there is no more slack in the system to avoid it.
Make no mistake the genie will come out of the bottle and it will not be a 3 wishes one.

regards


arik schickendantz

Posted by arik schickendantz at February 18, 2007 10:10 AM

I think you are too kind to Brown, David. After the years of Tory public service underfunding Labour was given a golden opportunity to make its vision of welfare provision work. What Brown and his colleagues have demonstrated instead is that, even in these times of relative prosperity and stability, Britain cannot afford even the public services it currently has, let alone satisfy the siren voices calling for more. How do we know this? Well for the reasons you identify - namely that Brown inherited a substantial surplus from Ken Clarke, has spent it all and now needs ever-growing borrowing to make ends meet. Whether Brown will get the blame for this we'll have to wait and see, but, as Frank Field pointed out the other day, Labour will need a new vision of how public services work in future, and it will involve spending less, not more. That doesn't sound like something Brown or his colleagues will be politically or intellectually suited to achieve.

Posted by bears all at February 18, 2007 04:00 PM

If I were summing it up, I'd say monetary policy generally good, fiscal policy bad. I've long been critical of fiscal policy under Brown, both the spending profligacy (of which the GP settlement is a good example) and the rise in the tax burden. It is not true, however, that Brown inherited a budget surplus from Ken Clarke. The IFS, in a recent assessment which I described as a little too kind to the present chancellor, said he was leaving with the public finances in a stronger state than he inherited. What is true is that the public finances were on an improving trend when he took over, but the jury is definitely out on whether that will be true over the next couple of years.

Posted by David Smith at February 18, 2007 05:07 PM


The Bank of England is not truely independant when the majority of it's policy makers are appointed by the Chancellor, hardly what I (or anyone else) would call "Independant" why does he need to keep a finger in this pie?

As for the Economy, it's one of smoke and mirrors, High house prices, a high street financed on Mortage Equity Release, "cooked" inflation figures, debt debt debt! I agree with one of the original posters, a recession is coming and it'll be the mother of all recessions - Economic Cycles are a part of EVERY nations economy, all we've done is keep ONE cycle going by feeding a debt monster.

Posted by Dan at February 20, 2007 11:58 AM

The Bank, to be accurate, is operationally independent - it operates on the basis of a target set by the government. Four of the members of the monetary policy committee are indeed appointed by the chancellor, and the government appoints the governor and his two deputies. But all members of the MPC have shown themselves to be independent in their actions, and certainly not dancing to any Treasury tune.

Is a "mother of all recessions" on the way? If there is, there's no sign of it. We've had an economic cycle but a cycle does not, and never did, require an outright recession. Household balance sheets are healthy, consumer spending has been funded out of real income growth - which is why it has slowed over the past couple of years - and inflation has risen a bit but is heading lower. Cheer up.

Posted by David Smith at February 20, 2007 03:19 PM

House hold balance sheets are healthy?

We've never had a boom without a bust, ever and no country ever has either, where's is the money going to come from to pay the debts run up by Brown? Where is the money going to come from to finance the re-valued council tax bands?

So what do you make of the record IVAs, Bankrupcies and Rising Reposessions?

The Economy is still running on cheap money, which will invariably dry up as reposessions and money troubles continue to mount, each quarter we are seeing "New Records" being broken which you can't deny is happening right now.

Your view in relation to the current climate seams to be, as long as the music is playing the party is in full swing, even though most of the revelers have a gutt full of debt??

Posted by Dan at February 20, 2007 04:05 PM

Household balance sheets are in a healthy state because household assets (wealth) are about six times' household liabilities (debt). There is a concentrated debt problem in the UK but not a general one, and there is also a strong element of people volunteering or being persuaded into bankruptcy or IVA arrangements by changes in legislation. Repossessions are increasing modestly from a very low base. There is nothing to suggest a debt-induced recession is likely, and you appear to be confused between public sector debt and private debt.

As for 'we've never had a boom without a bust', it depends what you mean. The UK has not had an inflationary boom - inflation has been low for 15 years and growth has been more or less in line with trend. As for the housing market, as I keep saying, the late 1980s and early 1990s was a rare event. Mostly, nominal house prices don't fall, even after a period of strong rises.

Posted by David Smith at February 20, 2007 04:21 PM

You can't really say balance sheets are healthy just because a piece of paper tells someone their house (or any other asset) is worth twice, three times what they paid for it - You aren't cash rich, its more of a "Fantasy" rich - which is only realised if you sell and downsize or move in with someone else or family etc.

And the proof of the argument is as I said before, how will people cope with 400% (as mooted) increase in council tax bills just because ON PAPER they are "Worth" more? Doesn't actually mean they have the incoming salaries each month to pay their council tax bills and other commitments.

The whole illusion that because you own a house that has doubled in value, that you are "well off" is a myth! You're as rich as the money you have in your pocket to spend.

And realising equity in an asset relies on, to a certain degree "The greater fool" to take it off your hands, and the amount of fools is dwindling as interest rates increase. What will be interesting to see is, as reposessions rise, and bad debts increase how willing banks will be to lend once share holders start screaming at falling proffits, if they start to tighten, where will it go for house prices, because if someone refuses to lend you the money the money because of the extreme leaverage of the investment, then the price has to fall.

As another poster comments, you're being way too kind to Gordon, he's got the country in unsustainable debt which the IMF have warned him about to my recollection at least three times now.

Posted by Dan at February 21, 2007 12:38 PM

So wealth means nothing? Interesting, but entirely unconvincing. Even if house prices halved, housing wealth would be worth more than housing debt.

As for Brown's debt, you'll see a number of pieces on this site which are critical of fiscal policy under him, as I've often been. But government debt as a percentage of GDP remains lower than when he took over.

Posted by David Smith at February 21, 2007 03:53 PM

David,

At the risk of sounding rude (I don't mean to be) you are always very balanced in your comments, but you perhaps sit on the fence a bit - which is, I suppose, understandable as an economist because this minimises the risk of being proved badly wrong (which would obviously be professionally embarrassing).

You say that the government debt is lower than under the conservatives. This is literally true, but it ignores two factors - Firstly, much debt has been shifted off the government books or is not accounted for (PFI and public sector pensions spring to mind) and secondly, it ignores the trend. The public finances were rapidly improving when Brown came to power and improved further because he stuck to the Tories spending plans for the first couple of years and he levied windfall taxes (e.g. mobile licences and utilities). Ever since then, they have been deteriorating and the trend is getting worse despite the fact that when the economy is supposedly doing well the finances normally improve.

Monetary policy may have been good, but then it seems to have been a very easy period for monetary policy internationally. Name me a western economy which has had an inflation problem since 1997? Just how difficult has it been to get right - I'd say not very. Add to this the fact that public sector costs have inflated wildly - but this isn't accounted for in the inflation figures - and I'd say that real inflation hasn't been as well controlled as some think.

Unlike one or two posters above, I don't think there is a major recession on its way (at least not a UK-specific one). But I think this is largely a consequence of stable inflation internationally. However, there has been a huge build-up of debt since we entered a low inflation era. Due to lower interest rates, this has been readily affordable. So what is the problem, you say? After all, we've moved from a relatively low debt, high interest rate economy to a high debt, low interest rate one - overall the cost of servicing debts perhaps hasn't changed much.

Well, during this period, the UK economy has been boosted by all the extra borrowing (both public and private), making growth look healthy. But at some point (about now, I think) the equilibrium is restored and the borrowing can no longer continue to increase. Borrowing must slow and the boost from debt increase is revealed to be a one-off phenomenon. Further, unlike in the old days, the value of the debt is not being eroded by inflation, so it stays with us for much longer. It then becomes apparent that the one-off boost from increasing debt was not a free lunch - we had a party and we then have to pay it off slowly and undramatically by slower growth in years to come as we have to service the debt for so much longer than we did in high inflation days. This isn't necessarily all Brown's fault (only the public sector borrowing part is), but my point is that debt increase fuelled growth has hidden the damaging aspects of Brown's policies which have slowed real underlying growth (the wasted spending, the tax complexity, etc.) which was very healthy (due to Tory reforms) in the first part of his chancellorship (let's not forget time lags in economic policy).

I'll also take you to task on one or two other assertions you have made. You now say that we have risen up the list of rich countries. How do you calculate this? Do you use crude money measures (which make our figures look good because of the value of the pound) or have you used purchasing power parity figures (which I suspect would make us look less good). Fraser Nelson in 'The Business' also pointed out recently that the UK economy had, in fact , performed worse than any other English speaking economy since 1997. We may look good compared to European economies that lacked Mrs Thatcher's reforms, but not relative to those that did. Brown is indeed lucky ythat he has nearby sclerotic economies with which to make his comparisons.

I really can't see how Brown can be praised. The bits he has got right were very easy to get right and the rest has been pretty poor indeed.

Posted by HJHJ at February 21, 2007 07:54 PM

I criticise when it is justified and, as I say, I've been critical of fiscal policy under Brown. But this has been the first time in very many decades that the UK has been more stable, in terms of both inflation and growth, than any other major economy. Given our record of extreme instability, that is quite an achievement. Anybody who can't recognise that has a very short memory. Compare it, say, with the extreme instability of the Thatcher era or, indeed, any other 10-year period you care to mention.

As for "true" public debt, don't forget that Labour didn't invent PFI or public sector pension liabilities. Your point about the improving trend of the public finances when Brown took over merely echoes one I have been making.

The public sector does contribute to inflation, both directly and indirectly. The fact that inflation has been low in spite of this is also quite an achievement. I'd recommend to you a paper on the Bank of England's website - which is honest both about the good fortune the Bank has had, but also about the fact that this has been far from an "easy" environment. The paper is here:
http://www.bankofengland.co.uk/publications/other/monetary/treasurycommittee/mpc/tsc070219.pdf

Posted by David Smith at February 22, 2007 03:04 PM