Hamish McRae: Has Gordon Brown suddenly realised where his own reforms have failed?

Privatisation, grasped by the Tories in the 1980s, had really been started by Denis Healey
Click to follow
The Independent Online

Job application? End-of-term report? Or just a pit of primate chest-thumping? Pre-Budget reports are, in many ways, more important than Budgets because they set the framework for the Budget, and tomorrow's surely must be the last that Gordon Brown will present.

So it is inevitable that it will be seen as a swan song: he will, like Tony Blair, want to leave his job on a high note. The Chancellor has perhaps a more precise template than the Prime Minister has for the next stage of their respective careers, though nothing is certain. But both of them will be thinking forward - crafting their actions now in preparation for what is to come.

I think we have to see the pre-Budget report in that light. This is not just another normal budgetary exercise. It is endgame. So what should we look for?

Well, there will be the usual forecast of the economy, which will be useful, interesting in its own way but unremarkable save for one feature: the size of the workforce. Growth this year will turn out a little better than expected, at about 2.7 per cent, thanks on the demand side to the continuing support from strong house prices, but thanks on the supply side to this large increase in the workforce.

The increase in the size of the workforce of about half a million people a year will, other things being equal, add about 1.5 per cent to the growth rate. We have to wonder how long this will continue. It comes from two sources: inward migration mostly from eastern Europe, and returning "oldies" to the world of work.

The first source, following the enlargement of the EU, will inevitably slow over the next few years, for the most vigorous of the potential migrants may well have already arrived. There is still a large pool of potential workers from the new EU member states, but it is not an infinitely large one.

The second, people of above normal retirement age, will continue to grow and there will be increasingly strong incentives for them to re-enter the workforce. But not all jobs can be done by older workers, for all sorts of practical reasons. So, yes, this will help support growth but it will not be a key driver of it. Still, this raises a really interesting question: is the growth trend of the UK economy higher than we thought?

The working assumption for half a century or more has been that the growth is about 2.5 per cent a year. Suppose it is nearer 3 per cent? After all, this year has seen growth a little below that and unemployment has risen. A quarter of a percentage point may not sound a lot but it is cumulative. If the long-term trend turns out to be, say, 2.75 per cent a year all the Government's sums look rather better than they do if growth were to average 2.5 per cent.

The point here is that the long-term growth trend of the economy has very little to do with the chancellor of the day. But it can make his actions look better: be more responsible, be more prudent. If, on the other hand, the increase in the size of the workforce shades back, then the big fiscal numbers look much worse. Maybe the Chancellor has simply been lucky.

The second thing to look for will be the assumption he makes on public sector productivity. The huge once-and-for-all step change in the size of the public sector is now over. It can grow only at the pace of the economy as a whole, even on his own figures.

There has been a cost to this increase in a slower growth of living standards than would otherwise have been the case. At the end of 2001, household consumption was 66.5 per cent of GDP, while government consumption was 20 per cent. Now the former is down to 64.5 per cent of GDP, while the latter is above 22 per cent. We are 2 per cent poorer than we would have been had public spending been held constant with the growth of the economy.

But now that shift is over. Increases in government spending over and above the rate of growth in the economy will have to come out of increased efficiency, and the question is what assumption will he make on that. What will be said about shifting resources to "front-line" services and how credible will this be? He will want to claim that the Government will continue increasing its output but there will be no new money to fund it. So assumptions about productivity are key. The higher the assumption of "savings", the higher the projected increase in real output. And the next chancellor will have to figure out how to do it.

Actually, I think there is huge scope for the Government to improve its productivity. There is also a huge role for the private sector to help it do so, using the techniques and knowledge base it has acquired rescuing failing companies.

It will be a fascinating task for the next generation, one that actually has already begun but which has a long way to go. But it will mean radical changes in the way the public sector operates, and cultural changes it will find hard to accommodate. And under this Chancellor it would be impossible because it requires complex bottom-up management change, not top-down Treasury control.

That leads, I think, to the third thing to look for: any suggestion that the system of Treasury micromanagement developed under Gordon Brown needs to be modified.

Am I asking the leopard to change his spots? I suppose, in a way, yes. But just as it is intriguing to see that the Prime Minister seems to be realising at last what he should have been doing about public sector reform, so too the Chancellor may be understanding where his own reforms have failed and need to be modified.

In any case, the Treasury is moving on. Nothing much is happening in government at the moment. Good civil servants can create an aura of activity and there will be lots of fluff in the statement today. But there is no point in trying to announce anything substantial because soon there will be regime change. So the Treasury needs to prepare for its Chancellor. It needs to line up the things it knows needs to be done but which it cannot sell to the incumbent - or which incumbent cannot easily adopt because it suggests past failure.

But there is continuity in financial policy, even when chancellors come from different parties. The outline for the present Bank of England monetary committee, setting rates to meet inflation targets, was in place before Gordon Brown took office. All he had to do was push the button. The privatisation programme, grasped by the Tories in the 1980s, had actually been started by Denis Healey. All they had to do was to expand it radically. So we should listen carefully to this final report for hints of changes to come, changes, perhaps, for Alastair Darling to implement?

A change in style, with rather more listening and rather less micromanagement, must come. It has to.