Expert View: Brown is looking like a man who threw it all away

We have long lost the income tax advantage of the Thatcher years
Click to follow
The Independent Online

The UK's economic record over the past 20 years has been impressive. Some 52 quarters of positive economic growth have delivered an extraordinarily low unemployment rate (4.7 per cent), and inflation has been ably contained. No other major economy in Europe can equal these achievements, as Gordon Brown is only too quick to point out to them. But the British rhetoric at the Hampton Court summit last week was more subdued, perhaps because we have a lot less to be smug about.

Long, long ago - all right, in March - the Chancellor was proudly boasting that the teenage City scribblers had got it wrong, and yet again we would chalk up an impressive growth rate of 3.5 per cent. His forecast has since been forced down to 2 per cent, while last week's data have got most of the scribblers predicting just 1.7 per cent. At that rate the UK economy is on course for its weakest performance in 13 years.

Meanwhile, inflation is not looking quite as safely under control. September retail price inflation rose from 2.3 per cent to 2.5 per cent, despite the "blood bath" on the high street, while on Friday, Industrial Relations Services reported the highest wage inflation in four years - 3.1 per cent.

Of course, with surging oil prices, the UK is by no means the only developed economy reaching Mervyn King's "bumpy patch in the road". But at the same time the dramatic deterioration in the UK's performance has a lot to do with Gordon Brown's descent into old-fashioned tax and spend policies.

As I noted last month, the Government's share of GDP has risen from 37 per cent (in 1999) to 42 per cent - the largest rise in any developed economy. A huge part of this has been the dramatic gearing-up in NHS spending, the biggest since the service began. While an increase in health spending may have been necessary after years of Tory neglect, the Government has done too much too fast, and in too unplanned a way.

The NHS budget has doubled over the past eight years, and this has taken health spending as a percentage of GDP from 6.8 per cent to 9.2 per cent (higher than the European average).

This switch from famine to feast has resulted in the extra cash going down the drain - or, more specifically, into fuelling public-sector wage inflation. Some estimate that over half the increased spend has gone into higher wages, and a good proportion of the rest has gone into drug-service inflation. Analysts at Williams de Broë recently estimated that if public-sector inflation had been kept as low as private-sector inflation, the economy would have grown 0.7 per cent faster over the past 12 months.

Of course, the other side to this spending coin has been the gradual tax creep. We have some of the highest taxes now on savings and we have long lost the income tax advantage the Thatcher years delivered us against our European peers. Indeed, even France and Germany may soon undercut us. In the World Economic Forum league table of global competitiveness the UK has slipped from fourth place in 1997 to 11th now. Even so, the shortfall in the balance between revenue raised and spent is rising rapidly. Some economists already argue for spending cuts or tax increases of £10bn.

This is going to be a very bumpy road for the Chancellor, and for his reputation. History may remember Gordon Brown as the Chancellor who threw away the hard-won British economic recovery. Prime minister material?

Comments