Pre-Budget statement: Doubts over growth undermine the message

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The Independent Online
THE WORDS are wonderful - but what is the reality?

The good news first. There were, ahead of yesterday's Green Budget statement of the Chancellor, a number of legitimate concerns. Would he take risks on government borrowing in the light of the incipient global recession? Would he use his speech to nudge the Bank of England monetary committee to continue to cut interest rates? Would he be sensitive to the fact that the Government's structural economic policies were just as important as its fiscal and monetary policies - that, for example, things such as administrative burdens on small companies and planning controls were holding back growth?

It is enormously encouraging, not just that Mr Brown avoided any such pitfall, but that he dealt specifically and positively with all these areas of concern. No, fiscal policy would remain (so it would seem) reasonably tight. Yes, the Bank of England's independence was reaffirmed. And, most encouraging of all, not only would he look at ways of raising business efficiency, he was aware that the Government needed to lift its own game on that front, too.

This all sounds terrific. Gordon Brown says all the right words. There is, never the less, a grave question: will reality match the rhetoric? This is, sadly, the core problem with this Government; the public relations is generally brilliant; the substance, by contrast, rather disturbing. There is one very serious concern arising out of Mr Brown's statement yesterday and a number of subsidiary ones.

The serious concern is the growth assumption on which the entire edifice is based. Those growth forecasts - 1 to 1.5 per cent next year, then around 2.5 per cent the year after, rising to 3 per cent after that - are at the absolute outer limits of credibility. They are not beyond those limits. It is just possible, if everything goes right, that we might make them. But the balance of probability is that we won't. Those growth forecasts are, therefore, at one extreme, while the other extreme is that there will be a serious recession either next year or early in the new millennium.

So you have to ask: what if? It is difficult to work out the sensitivities of these tax and spending estimates: to what extent they will fall to bits under different growth scenarios. Crawling over the figures will take several days and we would probably end up with the wrong answers anyway. But clearly you don't need to forecast an actual recession as bad as in the early 1980s and early 1990s to know that these figures are likely to be wrong. Mr Brown got his growth forecast for the economy wrong four months ago. We have no particular reason to think that he is got it right now.

This leads to the subsidiary concern. On fiscal policy, the most important will be how swiftly he will react if the borrowing numbers turn out to be worse than expected. He has only experienced taxes rolling in above budget and spending contained by solid growth. It has been the buoyancy of the economy, more than his own tax measures, that has made this happen. It is easy to get a budget surplus at the end of a long boom - even the United States has managed that now. So will he cut spending, or will he, Micawber-like, wait for something to turn up? Or, a further option, would he nudge up taxes, hitting things such as pension funds, which find it difficult to fight back?

There are similar concerns on monetary policy. The public statement in support of the Bank of England was impressive. But it made a strange contrast to the way in which, in private, he and his henchmen sought to nudge the Bank of England into cutting rates - as they did a month ago at the International Monetary Fund meeting.

The final set of concerns is over whether reality matches rhetoric over government policy to industry and the Government's own performance.

The Chancellor identifies brilliantly what needs to be done. He hits all the right buttons. Sadly, it is not clear that there is anyone at the other end of government taking any notice.

Let me give an example. When the Government came in, it declared that there was an overriding need to help industry cope with the millennium bug - the glitch that may make computers think the year 2000 is actually the year 1900. The Government declared the importance of the matter - and then, once in power, not only ignored the unit co-ordinating the effort to cope with the bug, but actually removed its funding and then, eventually, set up an alternative body. It lost a whole year's work as a result.

You have to apply the "millennium bug test" to its other initiatives. So will small firms really find they face less red-tape? Will absenteeism in the public sector really decline, or will they just massage the figures?

Will planning restrictions really be eased, or will we have a rerun of the situation in which planning consents were removed retrospectively to stop the building of gas-fired power-stations?

This is going to be a difficult three years for the world economy. We are, thanks to the progress made over the past 20 years (but not much has really changed in the past 18 months) in relatively good shape to cope with this more difficult time.

There is lots still to be done, and Gordon Brown has correctly identified these priorities. If only he could make the action match the words. If only.

Main Points

GROWTH FORECAST REDUCED

Growth forecast for 1999-2000 cut to between 1 and 1.5 per cent rising to between 2.75 and 3.25 per cent in 2001-2002. Inflation forecast to stay on target at 2.5 per cent. Current account surplus of pounds 33bn forecast over next five years allowing Chancellor to meet "golden rule" of borrowing only to invest.

BACKING FOR ENTREPRENEURS

Range of measures being examined, including reduction in small firms' Corporation Tax, doubling of employee share ownership and making bank finance easier to obtain. Also review of planning laws, 20 per cent increase in Office of Fair Trading's budget, merger of Inland Revenue and Contributions Agency.

BOOST FOR WELFARE AND HEALTH

Extra pounds 250m for the NHS this winter. Minimum income of pounds 117 a week for a pensioner couple. Disability income guarantee of pounds 150 minimum weekly wage for single disabled person moving into work and pounds 220 for disabled parent. Childcare tax credit extended to cover all children up to 14.

FRESH WORK AND TAX INCENTIVES

Additional 60,000 places for long-term unemployed under New Deal. Minimum income guarantee for low-paid families raised to pounds 190 a week. Tax cut of pounds 66 a year for all employees through national insurance changes. Commitment to introduce 10p starting rate of tax remains.

TAX BREAKS FOR R&D SPENDING

Extra pounds 250m to train teenagers. Tax breaks for firms seconding staff to schools and colleges. pounds 25m to create eight new Institutes of Enterprise in universities. Further private-public partnerships to commercialise scientific inventions. Tax credits for small firms to invest in research and development.

CUT IN CLEAN CAR DUTIES

Consideration of an energy tax on industry to help to cut greenhouse gas emissions.

Consultation on the proposal for a pounds 50 reduction, from the current pounds 150 flat rate, in vehicle excise duty for the smallest and most environmentally efficient cars.

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