Hamish McRae: As always with Gordon, the devil will be in the detail

'This is not a disaster, but it will be a squeeze. That squeeze is now beginning'
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The Independent Online

It was not really much of a Budget in the conventional sense of the word, more a statement of the philosophy of government. It was Gordon Brown's answer to the question: what should be the nature of a government in a developed economy in the 21st century?

And his answer? It is something like: a competent but bossy state that both pushes and enables people to live orderly, successful middle-class lives. You could characterise this as "Gordon knows best". But you would also have to acknowledge that under his stewardship the economy has indeed continued to prosper, even if there are concerns about the path ahead.

The starting point is that a national Budget, like any other budget is about income and expenditure. But this one did very little to the big numbers of tax and spending. He plans to borrow a couple of billion more than he planned to do last December but that is small in the context of spending of £551bn.

But the detail of the spending is extraordinarily complex. There were more than 200 pages of press notices. There were, according to Royal Bank of Scotland, 45 decisions on public finances, which together "gave away" £380m a year. That is tiny in the context of total spending.

The detail on the tax side is equally complex. It will take several days for the accountants to figure out the full consequences but already they have spotted enough changes to ensure they will be busy in the months ahead. Thus there is a new leasing regime that KPMG thinks will increase the cost of investment for small and medium-sized companies. On the other there is more tax relief for innovative ideas, so money clawed back in one way will be dished out in another.

The Chancellor boasted in his speech about the rise in the numbers of self-employed but the time they have available for filing for income tax has been cut by five months. So not only is taxation becoming more complex; there is less time to sort it out. Ernst & Young complain about changes to trust law, which will increase inheritance tax burdens for some people, countering the rise in the tax thresholds. There are changes in venture capital provision, changes in property investment, changes in the terms under which companies can equip their staff with laptops and on and on.

It is fascinating, if slightly spooky, that anyone can think that all this fiddling is the right way to run the nation's finances. I am told by people in the Treasury that they have been absolutely desperate to make sure the Chancellor will not break his golden rules this year. The finances are on a knife-edge and it would blow his credibility were he to fail.

You can always fiddle with current spending to reclassify it as investment but you cannot change the growth numbers or the overall borrowing needs. He missed his growth forecast by a mile and is £5bn off his borrowing target. Indeed the public finances are a touch worse than he said they were in the pre-Budget report in December, when most of the bad news came out. But he does not seem to worry about these big numbers. These are hardly mentioned. Instead he focuses relentlessly on the small ones.

This leads to two big questions. Are these big numbers going to be a serious problem in the months and years ahead? And if the business community and its accountants are feeling increasingly frustrated at the relentless fiddling, why does the economy still seem to be doing all right?

The problem with the numbers is on the revenue side. There is a problem of the efficiency of public spending: how much of the additional money is being wasted? But the Treasury can shut off the spending tap. It cannot however guarantee revenue and its estimates for the past five years have all been too high. I would be astounding if tax comes in on forecast this year. If this is right, then the government will be struggling to finance its spending plans, which for all the Chancellor's talk of more money for schools, will become increasingly tight.

This is not a disaster - at least I don't think it will be one - but it will be a squeeze. That squeeze, to judge by his comments on efficiency, is now beginning. The Government will be much more constrained in its spending in the coming five years than it has been in the past five.

The answer to the second question is more subtle. Britain is now an unusually competitive world economy. That is why we have become second only to the US in the G7 in terms of income per head, the point made in the Budget speech. A lot of this is the result of the success of the financial services industry, which depending on how you look at it, goes back to growth of international banking in the 1960s, or the "big bang" reforms of 1986. Gordon Brown is very aware of this, hence the City stuff announced in the speech.

There are other aspects to this success, including the labour market reforms of the 1980s, the growth of other service industries, the strong education sector, and so on. Oil has helped too. But the real engine is financial services. London is in a two-horse race with New York in the world's most profitable industry and they are nose-to-nose.

The two absolutely central issues facing a British Government in the next few years will be how to ensure that the success story continues and how to spread the benefits of that success story more widely.

The response of Gordon Brown would be to say that stable macro-economic management, plus some nudges here and there, is the key to the first. And public spending, targeted and audited, is the key to the second.

His critics would say, as far as the first is concerned, that he inherited the success and that while he did indeed give stability, that has been at the cost of large debts, some hidden, that future generations will have to service. On the second, they cite the NHS and say that the falling productivity suggests that the surge in spending has been a wasteful way of spreading the wealth.

So what do we want: competent but bossy government or something else, as yet undefined? With Gordon Brown what you see is more or less what you get.

* Treasury Budget site

* Chancellor's Statement in full

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