Bill Robinson: The unfashionably fiscal Gordon

Later this month Gordon Brown will present his pre-Budget report. It is likely to show a sharp deterioration in the public finances. But that is as it should be. Last week produced another significant sign of slowing economic activity, the first rise in claimant count unemployment. In economic downturns social security payments rise while tax revenues fall. The resulting increase in government borrowing is a net stimulus to the economy. Just what is needed in these difficult times.

Gordon Brown has sought to portray himself as the prudent Chancellor who has banished the cycle of boom and bust by laying down fiscal rules and sticking to them. He has never claimed to be a fiscal activist, because Keynesian demand management went out of fashion a quarter century ago. According to Treasury orthodoxy, the job of the Chancellor at Budget time is not to steer the economy. It is simply to set tax rates and public spending levels so as to hit the medium-term targets for government tax revenues, spending and borrowing.

Yet a case could be made that Mr Brown is the most successful fiscal activist of modern times. He controlled public expenditure very tightly in the first three years of his stewardship. At the peak of the boom he took around £20bn of cash from the private sector by the sale of the 3G telecoms licences. He subse- quently announced a major expansion of government spending on health and education, which now seems remarkably well-timed, to counter the fall of private sector demand in the downturn of the early 2000s.

The turn-round in government finances between the last financial year and this (estimated by Goldman Sachs at £40bn) is one reason why Britain is enjoying the best performance of the major economies. A sizeable stimulus is clearly under way.

The stimulus is more than welcome, because manufacturing industry's confidence has fallen steeply again, says the CBI business optimism indicator. That measure has had a remarkably good track record in predicting recessions, apart from in 1998 when it predicted a sharp fall when it was only a small dip.

The current downswing in confidence looks as bad as 1998. We must expect a worse outturn this time around because the world economy is in a less healthy state. The events of 11 September have pushed the US into outright recession, and that is particularly bad news for the fragile Japanese economy, so dependent on its large export markets in the US.

I wrote (before 11 September) that the severity of the UK recession will depend mainly on whether business confidence recovers before consumer confidence collapses. The latest figures tell us that the terrorist attacks have made that less likely, by further damaging confidence, in the service sector as well as in manufacturing. Not surprisingly consumer confidence has also faltered, but less than in 1998 (so far). Consumers are being buoyed up by the lowest interest rates for a generation. The stock market has proved quite resilient, and although the housing market is quiet, prices are still well up on last year's.

The bottom line is that although the news from abroad is bad, the UK consumer has not yet lost heart. Although the public finances are inevitably deteriorating there is no cause for concern. If the Government has to spend more money to fight terrorism it can afford to do so. And the spending will provide another welcome boost to a fragile economy.

Step forward again Gordon Brown, the reluctant (but effective) fiscal activist.

PricewaterhouseCoopers