Budget 1999: Politically, it sounds good. But will it work?

OH, TO be a Chancellor with a budget surplus, for suddenly Christmas has come. It is wonderful, is it not, how the dynamics change. Instead of having to explain why tax rates need to go up or cuts have to be imposed on hard-pressed public services, you just dribble out the good news: a bit of money here, a tax cut there, all phrased in the idea of "helping" people. Politically, it sounds terrific. Will it really work?

Apply three tests. Are the assumptions credible? Will the additional spending deliver value for our money? Is the fine-tuning of the tax system well-targeted?

The starting point is the Chancellor's economic forecast: the surpluses are the result of two things, the series of small tax increases imposed (usually with a delay) over the past five years, and the long boom. The tax increases continue, but will the boom?

The Chancellor says that after the briefest pauses this year it will: 1-1.5 per cent this year (against a consensus forecast of around 0.8 per cent), 2.25-2.75 per cent next year, and 2.75-3.25 per cent in 2001. Can this be right?

Well, it is perfectly possible that the consensus will be wrong and the Treasury right - such aberrations have been known to happen. My own instinct is that this year growth may indeed turn out above 1 per cent, but there may be much more of a problem next year. As for growth around 3 per cent in 2001 - that only happens if most things in the world economy turn out toward the better end of the possible scale. In short, the growth assumptions are at the top end of the likely range of outcomes. They are not impossible to achieve, but they are not the most likely outcome.

So the Chancellor is taking a medium-sized risk on growth. He is also taking a smaller risk on inflation. Assume that the 2.5 per cent target is met, for that is not the problem. The problem is that the 2.5 per cent target itself may look high by international standards as price destruction sweeps across the world. True, our method of calculating inflation produces a higher figure than that used by the other European Union nations, but even allowing for that, 2.5 per cent is high by developed country standards. These are not forecasts designed to push UK interest rates down to Euroland levels.

In short, the Budget projections carry risks. Given the awkward way economic reality tends to depart from comfortable expectations, beware the rosy glow surrounding his forecasts.

The next test is whether the additional spending will deliver value? We cannot know. The Chancellor's device is to make lots of noise, announce lots of tiny initiatives, devise lots of cutely-named schemes. We can see the input, but we cannot see the output. The omens are not brilliant. No-one should doubt the commitment of Gordon Brown to try to boost enterprise, but surely all past experience shows that governments boost enterprise by cutting regulation rather than introducing very complicated new spending schemes.

The Government's initiative on the millennium bug problem bodes ill. It lost a year by sacking the original advisers and delaying in appointing new ones, then launched a help programme which small businesses find useless.

The additional funds given to mainline government departments may indeed improve their performance - they certainly ought to - but we should judge by measures of the quality of output, not input. And the additional funds for enterprise? Well, the best that can be said is that they may offset to some extent the administrative burdens loaded onto small and medium- sized businesses since the election.

Test three is whether the rebalancing of the tax system encourages people to do the things that are helpful to society and discourages them from doing the things that harm society. For example, has he done enough to reduce the very high marginal rates of tax as people move from welfare into jobs? That is perhaps the single most damaging aspect of UK income taxation.

The aims here are completely laudable. It makes great sense to shift funds from home-buyers by ending mortgage interest relief at source (Miras) and move it towards the low-paid. It makes sense to take so many pensioners out of the income tax system. It makes sense to take a slightly larger cut on stamp duty on expensive homes. It makes some sense to increase fuel duty - though when talking about the fact that British consumers were hard done by, the Chancellor did not stress that Britain has the most expensive motor fuel in Europe. Paying too much for petrol and diesel probably worries more people than paying too much for computers.

In balance, Mr Brown is probably making incremental improvements to a tax system that is already, by world standards, benign. If there is a reservation, it is that these improvements, at least as far as companies are concerned, seem to be at the cost of some additional complexity. All chancellors have a desire to fiddle with the system; this one suffers from it as much as most.

How will this Budget be viewed in history? You could almost say, that given the penny of the basic rate for 2000, it will be Mr Brown's shot for Labour at the next election. The good news, not just for this year but also for 2000, is in the pot. Sure, there will be some fine-tuning next year but given the lags between a policy being announced and taking effect, we are really being given a budget on which we should judge not only the Chancellor but also the Government.

If the good times continue to roll, and these modest tax cuts and modest public spending increases can be unwrapped year after year, then we will all say thanks to Santa. And if growth is indeed 3 per cent in 2001, then the Government can expect to be popular indeed. But are there not too many "ifs" here?

Apply the tests. Are the economic assumptions credible? Not really. Will additional spending bring better value for money? Fingers crossed. Is the tax system being improved? On balance, yes.

That is not a bad score; in fact it is quite a good one. But if test number one fails and the economy slows seriously next year, then yesterday's warm glow will quickly fade.

Suggested Topics
Start your day with The Independent, sign up for daily news emails
football This was Kane’s night, even if he played just a small part of it
travel Dreamland Margate, Britain’s oldest amusement park, is set to reopen
Founders James Brown and Tim Southwell with a mock-up of the first ever ‘Loaded’ magazine in 1994
Threlfall says: 'I am a guardian of the reality keys. I think I drive directors nuts'
voices The group has just unveiled a billion dollar plan to help nurse the British countryside back to health
The Westgate, a gay pub in the centre of Gloucester which played host to drag queens, has closed
ebooksA special investigation by Andy McSmith
  • Get to the point
Latest stories from i100
Have you tried new the Independent Digital Edition apps?
Independent Dating

By clicking 'Search' you
are agreeing to our
Terms of Use.

iJobs Job Widget
iJobs Money & Business

Recruitment Genius: Retirement Coordinator - Financial Services

Negotiable: Recruitment Genius: To provide a prompt, friendly and efficient se...

Recruitment Genius: Annuities / Pensions Administrator

Negotiable: Recruitment Genius: You will be the first point of contact for all...

Ashdown Group: HR, Payroll & Benefits Officer - Altrincham - up to £24,000.

£18000 - £24000 per annum + benefits: Ashdown Group: HR, Payroll & Benefits Of...

Ashdown Group: Learning and Development Programme Manager

£35000 - £38000 per annum + benefits : Ashdown Group: A highly successful, int...

Day In a Page

The saffron censorship that governs India: Why national pride and religious sentiment trump freedom of expression

The saffron censorship that governs India

Zareer Masani reveals why national pride and religious sentiment trump freedom of expression
Prince Charles' 'black spider' letters to be published 'within weeks'

Prince Charles' 'black spider' letters to be published 'within weeks'

Supreme Court rules Dominic Grieve's ministerial veto was invalid
Distressed Zayn Malik fans are cutting themselves - how did fandom get so dark?

How did fandom get so dark?

Grief over Zayn Malik's exit from One Direction seemed amusing until stories of mass 'cutting' emerged. Experts tell Gillian Orr the distress is real, and the girls need support
The galaxy collisions that shed light on unseen parallel Universe

The cosmic collisions that have shed light on unseen parallel Universe

Dark matter study gives scientists insight into mystery of space
The Swedes are adding a gender-neutral pronoun to their dictionary

Swedes introduce gender-neutral pronoun

Why, asks Simon Usborne, must English still struggle awkwardly with the likes of 's/he' and 'they'?
Disney's mega money-making formula: 'Human' remakes of cartoon classics are part of a lucrative, long-term creative plan

Disney's mega money-making formula

'Human' remakes of cartoon classics are part of a lucrative, long-term creative plan
Lobster has gone mainstream with supermarket bargains for £10 or less - but is it any good?

Lobster has gone mainstream

Anthea Gerrie, raised on meaty specimens from the waters around Maine, reveals how to cook up an affordable feast
Easter 2015: 14 best decorations

14 best Easter decorations

Get into the Easter spirit with our pick of accessories, ornaments and tableware
Paul Scholes column: Gareth Bale would be a perfect fit at Manchester United and could turn them into serious title contenders next season

Paul Scholes column

Gareth Bale would be a perfect fit at Manchester United and could turn them into serious title contenders next season
Inside the Kansas greenhouses where Monsanto is 'playing God' with the future of the planet

The future of GM

The greenhouses where Monsanto 'plays God' with the future of the planet
Britain's mild winters could be numbered: why global warming is leaving UK chillier

Britain's mild winters could be numbered

Gulf Stream is slowing down faster than ever, scientists say
Government gives £250,000 to Independent appeal

Government gives £250,000 to Independent appeal

Donation brings total raised by Homeless Veterans campaign to at least £1.25m
Oh dear, the most borrowed book at Bank of England library doesn't inspire confidence

The most borrowed book at Bank of England library? Oh dear

The book's fifth edition is used for Edexcel exams
Cowslips vs honeysuckle: The hunt for the UK’s favourite wildflower

Cowslips vs honeysuckle

It's the hunt for UK’s favourite wildflower
Child abuse scandal: Did a botched blackmail attempt by South African intelligence help Cyril Smith escape justice?

Did a botched blackmail attempt help Cyril Smith escape justice?

A fresh twist reveals the Liberal MP was targeted by the notorious South African intelligence agency Boss