Hamish McRae: If the Chancellor played it straight then maybe we wouldn't be so grumpy

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The Independent Online

It's strange, isn't it? Yet again Gordon Brown reports on another year of successful economic growth - growth that is delivering higher living standards for most of us. People come from all over Europe, indeed from all over the world, to find jobs here. Sterling is strong and stable. Interest rates are, by historical standards, low. And if taxation has crept up a fair bit, the basic rates of VAT and income tax have not been increased.

Yet we feel bad-tempered. The response to the pre-Budget report last week ranged from sullen acceptance, though varying degrees of disappointment, to real fury. What is more, strong signs in the figures are pointing to reasons we might have to feel even more bad-tempered in the future. Something is going wrong but it is hard to pin down what.

Part of this may just be political ennui - a reaction to a face that has been around too long: too lugubrious, too bossy. Insofar as it is, partial relief will come next year, for there will be a new Chancellor. At least there will be providing a Prime Minister Brown does not abolish the office so he can run the whole show himself. If that happened, it really would be time to head for the hills.

But it cannot just be politics. There is an economic story too and this latest pre-Budget report highlighted what has been going wrong.

You have to distinguish between the success of the UK private sector - particularly its service industries, which have been growing solidly and increasing employment - and the gradual deterioration of the public finances. The reasons for the successful economy go back many years - to the labour market reforms, and other changes, of the 1980s. That, plus relatively low company taxation, was really why the UK used to feature so high in the league of world competitiveness. We have subsequently come down a bit, partly because of increasing regulation but also because other countries have started to deregulate and cut company taxes themselves.

As a result, the business community has moved from fairly supportive to quite critical. It is true that inward investment has continued strongly, but that is partly because foreign companies here manage to organise their affairs so they don't pay a lot of tax. Foreign individuals can manage to do the same.

As for the underlying competitiveness, that has much to do with the size of the financial sector, the benefits of being a global centre in the best time zone, the English language and so on. It is not particularly to do with Mr Brown - or at least that is what most people, fairly or unfairly, seem to think.

If you look at the public finances, you will see grounds for both criticism and concerns about the next few years. The left-hand chart shows what has been happening to public spending each year and what is projected to happen in the future.

As you can see, the Chancellor clamped down on spending in his early years - arguably too harshly. Then came the boom years, with spending rising by more than 4 per cent a year. Now these are coming to an end: from next year onward, spending will increase at or below the rate of growth of the economy.

That will create a quite different political climate - one where government employees will be under tremendous pressure to do more with the same, or indeed fewer, resources. Mr Brown is assuming the public sector can achieve large increases in productivity - something it has failed to do so far. On most measures, in fact, productivity has fallen in recent years.

Maybe it is a sense of taxpayers' money being wasted that is damaging the perception of the Chancellor, and it would be natural if it were. Because he has been so prescriptive about how other departments should spend their money, he gets the blame if they spend it badly.

But looking ahead, the dynamics will be different. A world where the public sector is under financial pressure is different from one where lots of dosh is available to throw at favoured projects.

Why can't spending go on rising? Because there are not the tax revenues to sustain it. Revenues keep on coming in below target. That, coupled with a lack of discipline on spending, means borrowing is consistently higher than forecast.

The right-hand chart, from the Institute for Fiscal Studies (IFS), shows how the forecast last week, the solid black line, is the worst of all. This is despite the increases in taxation he announced. Back in 2002, the current budget was not projected to go into deficit at all. Now it will have been in deficit for a full six years and the Chancellor has to fiddle about with the dates of the economic cycle to prevent himself breaking his own rules.

The Item forecasting club calls this manipulation of the cycle farcical, and it is hard to disagree. The IFS feels there should be independent monitoring, and it is hard to disagree with that too. But the bigger point here is not that the Treasury has to fiddle about to meet its targets but the reasons for missing the targets in the first place.

The explanation comes in two parts. One is simply that when you are increasing public spending very fast, you find it hard to control what you are doing. Most of us know that if we get a sudden windfall of extra cash, we don't spend it with quite the care that we do our monthly salary. Hence the Treasury has been bad at controlling spending.

The other has something to do with our general willingness to pay more tax. Back when Mr Brown took over, the general perception was that, while no one liked tax, at least he wasn't out to cheat us. That seems to have changed: not only have taxes been increased by stealth but regulations have been chopped and changed in a way many people resent.

Take just one example from last week: the requirement for people with a personal pension to buy an annuity at the age of 75. In the spring Budget, Mr Brown said this would be eased. Provided they drew down a minimum amount, the pot could be passed to their children. Now, six months later, he has gone back on his word and changed the regulations again.

Not only has Mr Brown made the tax system vastly more complex, he also changes his own rules as he goes along. I cannot recall any previous Chancellor in the past 30 or 40 years behaving like this.

So people feel cheated. As a result, they are putting more energy into trying to trim their tax bill in all sorts of legal ways, and, some of them, in illegal ways too. The result is that tax revenues come in below target.

If this is why people resent Mr Brown, that does at least create an opportunity for his successor. The fundamental financial picture will be much harder but there will be an opportunity to rebuild trust, and that should be the next incumbent's prime goal.

Britain's brim full with hooray 'Henwies'

On a more cheering note, did you know that there are 440,000 dollar millionaires in Britain, more than any other country bar the US and Japan?

A study last week by International Financial Services analysed the various bits of data on global wealth and concluded that Britons had $6,553bn (£3,350bn) of assets under management at the end of last year, equivalent to 7.4 per cent of the world total. The US rich had $31,296bn and the Japanese $11,861bn. These figures apparently exclude people's main homes.

For those who don't follow these things closely, there are four main categories of the rich. There are the ultra-high net worth individuals, who have more than $30m (£15.5m) to invest; the very high net worth ones, with more than $5m; and the high net worth individuals (HNWIs - pronounced "Henwies"), with more than $1m. Finally, there are the poor old mass affluent who only have between $1m and $100,000 to invest.

What seems to be happening is that London is gaining ground in the global fight to gain market share in investing the assets of the global rich. There are, suggests the report, a number of reasons why this might be so.

These include the attractions of UK jurisdiction for non-residents, the relationship between the UK and offshore centres that operate under common law, and sound and predictable regulation.

There is also the accumulated financial expertise. I saw a study the other day which suggested that London-based managers performed better in all categories of funds than their continental counterparts.

So clearly, this is a good and growing business. Make you feel jealous? Console yourself with the knowledge that the fund managers have another acronym for a sub-section of their more difficult clients: not a HNWI but a HNWA. You can work out for yourself what the "A" stands for.

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