Can we trust the Chancellor not to repeat his mistakes?

If Mr Brown does not acknowledge the possibility of recession, then we should start to worry
Click to follow
WHAT A difference four months makes. Remember the July spending statement by the Chancellor? The message was something like: we will spend more on health and education, the largest increase ever in the history of our nation, and we will still be immensely responsible and not borrow nearly as much as the Tories did, and all this will be paid for by the solid 2 per cent plus growth in our economy etc, etc.

Well, at the time - as we said here - this seemed an extraordinary gamble. To pay for his additional spending Gordon Brown was making a bet not just on the performance of the British economy, over which arguably he had some influence, but also on the world economy, over which he had none.

Today, in the so-called "green Budget", we will get a rather different picture. Growth next year will, ahem, not be quite as good as expected four months ago. In fact it will be only half the level. This will, of course, mean that government borrowing has to go up, because tax revenues will be lower and welfare spending higher, but Mr Brown will be confident that his projections are robust and that the Government can still obey his golden rule about not borrowing for consumption, only for investment.

It is, I suppose, a bit mean to start picking the Chancellor's plans to bits before he has even announced them, but this is a grown-up world, and last July Mr Brown did not behave in a grown-up way. If it was so easy for us here in a newspaper to know that his plans depended on a growth forecast which was almost certainly grossly over-optimistic, surely it would not have been very difficult for him to have reached the same conclusion. If he was wrong last time, why should we think he will be right now?

So the starting-point this afternoon, when listening to Mr Brown's speech, is to see whether he acknowledges the possibility of recession next year. His main-line forecast will be for growth of about 1 per cent, but it is perfectly possible that growth will be zero or even negative.

Of course no one knows whether there will indeed be recession next year. For what it is worth, JP Morgan, the big New York bank, is now forecasting that the UK economy will have six months of negative growth, which would technically be a recession, and Goldman Sachs has cut its forecast for the year to 0.4 per cent and reckons that the economy is teetering on the brink of one. My own best guess is slightly different - that demand may hold up reasonably well through next year, but that the downturn will come in 2000.

Frankly, though, none of us really can forecast the economy a year ahead, let alone two or three years, with real accuracy. Forecasts are a useful starting-point but they should carry a health warning explaining that they may be very wrong.

What we do, however, know with considerable certainty is that an economic cycle still exists, that slow-downs will therefore come every six to ten years, and that some of these slow-downs will turn into recessions. The only sensible approach for governments, companies and individuals is to accept that the forecasts may be wrong, and to learn how to react quickly when they are: in short, to plan to be nimble.

That is the test that we should apply to Gordon Brown today - not whether he is right, because he won't be, but rather, how nimble he is likely to be when he turns out to be wrong.

There are three main ways in which a government can influence the economy: fiscal policy (overall levels of taxes and spending); monetary policy (mainly interest rates), and structural policies (regulations, economic legislation, and the detail of taxation in so far as it affects the efficiency of the economy).

We can start to make sensible judgements about fiscal policy if Mr Brown shows a bit of humility for the fact that his forecasts of four months ago were hopelessly wrong, and explains what he might do if the new set turn out to be wrong too. It is perfectly reasonable for government deficits to rise a bit during down-swings, just as the Government should go into surplus during up-swings. But the idea that budget deficits can counterbalance the cycle has been largely discredited. We had a deficit of 7 per cent of GDP in the early Nineties, but the economy failed to recover until sterling left the ERM and interest rates were cut. So to have any real confidence in the new tax and spending plans we have to have some feeling for the acceptable limits of borrowing, and for what may happen if there does turn out to be a recession. If Mr Brown does not acknowledge the possibility of recession, then we should start to worry.

On monetary policy, we still have national control of interest rates, unlike most of the rest of Europe, where rates are coming under the control of the European Central Bank. Since the Bank of England was given monetary independence that control is no longer directly in the hands of Mr Brown, but, as everyone knows, rates remain an intensely political issue.

Will Mr Brown continue to try to bully the Bank to cut rates more? He would be very silly to do so. Paradoxically, the more independent the Bank appears to be, the more likely it is to be able safely to cut rates. To cut rates without risking a run on the pound requires that particular aura of credibility that central bankers seek to generate. The more independent they are seen to be, the more credible they seem to become.

And structural policy? It is the hardest to evaluate, and the most important of the three. Look at Japan. Socking great budget deficit; interest rates of less than 1 per cent; nothing happens. Why? Lousy structural policies - lots of silly regulations, tax distortions, opaque company accounts, and so on.

So the question to Mr Brown should be this. What are you doing, in these plans, to make the whole economy more efficient? Are you adding to, or cutting, regulations? Are you making the bit of the economy under your direct control, the bits run by government, more or less efficient? Is public investment being spent wisely, or are projects continuing to come in way over budget - like the British Library, the Jubilee Line extension, the new air traffic control centre, MPs' new offices, and so on. These sorts of question are enormously important, for the obvious reason that government is 40 per cent of the economy.

But there is also another, and less obvious reason. If public spending plans have to be cut, as I believe they will sooner or later, it is vital that they should be cut in a way that does not damage the rest of the economy: that government does not pass on its own problems to the rest of us. So if money has to be saved, it would be much better to save not by cutting purchases in Britain from British enterprises, but rather by cutting on spending abroad - where incidentally, the Government runs a large deficit.

First of all, though, it would be nice to have a bit of humility. Last July Mr Brown made a mistake with his sums. It was blindingly obvious that he had. The thing that would most increase his status now would be for him to admit that he was wrong.