Budget 1999: A mixed welcome for Mr Ten Per Cent

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The Independent Online
AFTER ESTABLISHING, in his first two budgets, a reputation for prudence, Gordon Brown has found some money to spend. On balance he has spent wisely, if perhaps too well.

Although there has been much talk of recession, we are still close to the peak of the economic cycle, and the public finances show it. Not since the peak of the 1988 boom has a chancellor had such a favourable fiscal backdrop.

To some extent, this fine economic weather is of Gordon Brown's own making. He wrong-footed the Tories before the 1997 election by promising to stick to their spending plans. He has talked endlessly of fiscal prudence ever since. But the statistics in his Red Book show that he has delivered. A dramatic reduction in public borrowing in 1997-98, of 3.3 per cent of GDP, has been followed by a further 1.2 per cent reduction in the current year.

Now, in his third budget, he has decided to reap the fruits of his earlier parsimony. With the economy faltering, he has decided that it is prudent to administer a small fiscal stimulus. He has done so in Brownian fashion. His summary table lists no fewer than 61 Budget measures - nearly one a minute in a speech of just over an hour.

Was it safe to deliver so much so quickly? The net effect is in fact quite small - a pounds 1bn stimulus in 1999-2000, rising to pounds 3.5bn in 2001-02. With the economy visibly slowing at present there is not much risk in this year's giveaway. But Mr Brown has promised tax cuts that will boost demand in the next century, when the economic environment may be less propitious.

A penny off income tax and the introduction of the 10 per cent band together cost pounds 4bn. The reform of National Insurance costs another pounds 3.5bn. There are further commitments to increases in the pensioners' winter allowance, in the minimum income guarantee for pensioners and in child benefit, adding another pounds 1bn.

So the big giveaways in year three total pounds 8.5bn. Some of this is offset by the heavily trailed abolition of the married couples' allowance and mortgage interest relief, which together yield pounds 3.5bn of extra revenue. But the net fiscal easing is still substantial, particularly since some of the other offsets look distinctly iffy.

The Chancellor has chosen to ignore the haemorrhage of tax receipts from tobacco duty and is counting on nearly pounds 500m from that source, not all of which will materialise. He has written in nearly pounds 2bn for a new tax on the business use of energy, which may not emerge unscathed from the long process of consultation that he is inviting. And many of his other offsets come from anti-avoidance measures and increased taxes on capital, which are notoriously hard to forecast.

So there is a risk that the surplus on the current Budget will not materialise. This package of measures will stall, rather than accelerate, the fall in interest rates. But if the City does not like the impact on borrowing costs, it can hardly object to the tax reforms. Mortgage interest relief, beloved by Mrs Thatcher because it encouraged home ownership, has been whittled away almost continuously through the Nineties. A period of low interest rates is a good moment to administer the coup de grace.

Finally, a mixed welcome for Mr Brown as Mr Ten Per Cent. As all thinking people know, the introduction of a 10 per cent income tax rate is a piece of headline-grabbing nonsense, much less effective than an increase in the personal allowance. On the other hand it would be churlish not to welcome, from this sensible Labour Chancellor, a 10 per cent starting rate of tax on small businesses and a 10 per cent rate on long-term capital gains.

The author is a director of London Economics and a former special adviser to the Treasury