Budget '97: Cynical, but politically astute

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The Independent Online
This is a very clever political Budget that has been dressed up to sound as if it had respectable economic objectives. I remain convinced that Gordon Brown's strategy has been to raise taxation as much as possible and as quickly as possible after the last election in order to allow him to be more relaxed on public expenditure in the run-up to the next election. It is a tax now, spend later policy.

Comparatively little of the extra taxation has been raised from the consumer. He has increased to some extent the planned rises on petrol and tobacco. He has cut away at mortgage interest tax relief and put up stamp duty on expensive properties. The modest increases these represent will not really affect Eddie George's decision on whether to raise interest rates further and faster in order to keep to the inflation target. The increases are difficult to defend against the election rhetoric, which implied to Middle England that taxation would not be raised; but the rises are not so great that the middle classes will feel betrayed.

They may even be cheered up a little by the announcements of increased spending on education and health. I am glad that Gordon has finally given up his absurd claim that he was going to stick next year to the totals that I had put in the Budget documents last November. He has drawn down in advance money from the Reserve, using a technique that I frequently used to increase spending on priority services.

He has not made cuts elsewhere, however, so that the sums for health and education are rather limited. There is no extra money for health or education this winter. Next year, the growth rate for the health service is much less than in some of the best years under our government. The capital allocation for new schools and school repairs sounds good, expressed as a global figure; but spread out over all education authorities over five years, it will not make an enormous amount of difference. This is tight public spending control for the first half of the Parliament, which will be relaxed in three or four years, as the next election looms.

The big money to pay for this comes from changes to the tax treatment of dividends, which will take about pounds 5bn from pension funds and others in three years' time. He has gone for the upper end of the rumours by raising pounds 5bn in windfall tax, largely from the electricity and water industries. The first measure increases the cost of capital and will cause some trustees and employers to top up their funds. It will reduce the capital value of some companies. The second is bound to have an impact on customers and employees of some companies, as well as hitting the shareholders of all of them. The reductions in corporation tax are welcome, but they do not offset, or anything like it, the huge cost to the corporate sector of these tax hikes.

The Chancellor shows the effect of all these tax rises in his forecast as sharply reduced public sector borrowing. In fact, some of his assumptions are so pessimistic that borrowing will come down even faster than he plans - until he starts boosting public spending in response to the lobbies to use up the surplus.

This would all be well-judged cynicism and politically astute, if it were not for the damage it is going to do in the medium term to the British economy. Gordon Brown is heaping up the tax burden on the economy much higher than the levels that he criticised when I planned them.

On balance, his measures could damage investment and they will certainly slow down the economy much more than is necessary. With the Governor of the Bank of England poised to raise interest rates to much higher levels than anyone expected when I was chancellor, the economy is going to slow. In two years' time, the effects on job creation and living standards will be the cost of this Budget.

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