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

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The Independent Online
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.