Hamish McRae: Just like the Prime Minister, the business world fears the accession of Gordon Brown

The problem is the effectiveness of spending - the competence with which funds are deployed
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The Independent Online

The business world does not in general like uncertainty - particularly political uncertainty. Yet the financial markets at least have managed to cope with the prospect of a year or more of political upheaval without batting an eyelid. They seem much more interested in the price of oil or US interest rates than the timing of the handover of the job of the British Prime Minister.

The benign explanation of this is that Gordon Brown is as trusted as Tony Blair - trusted, that is, not to mess up what has since 1992 been a broadly successful economy. In any case, what happens in the world is more important to big business and big finance than what happens in little Britain.

Besides, business is used to succession problems: the chairman who holds on too long, the finance director who does not get on with half the board. The succession in the Labour Government may look a bit of a mess, but compared with the business world it does not look too bad. At least there is a credible successor, and if he turns out to be a disappointment, well he can always be sacked.

There is, however, a less charitable response. I don't think there is any single business view about the turmoil in the Government any more than there is a single view in any chunk of society, but there are widespread concerns about the direction of the Government, which have been suppressed while Blair remains Prime Minister. In a nutshell, the Prime Minister's known fears that his Chancellor might not be New Labour enough are pretty much shared by the business community. While he is around there is a check; when he is not, there won't be.

That might seem unfair. Gordon Brown has been an extremely successful chancellor, turning the initial suspicion of the business community towards Labour into real, if grudging, respect. The weakest element of British economic policy, the lack of macroeconomic stability - the boom/bust cycle - was corrected, maybe cured, and that was a pretty big achievement. But in recent years that respect has started to slip away for two reasons, maybe three.

First and foremost has been the increased complexity of government tax policy. At a popular level, the Chancellor is attacked for putting taxes up - "stealth taxes". Actually, taxation had not risen much until the last year. The Chancellor had tried to increase revenues as a percentage of GDP, but had largely failed. That was why he kept missing his fiscal targets and had to borrow more than planned.

At a business level, the issue has not been the level of taxation, but the endless chopping and changing of the way taxes are applied. Some industries have been more messed about than others - films, oil, pensions, for example - but everyone feels oppressed.

In the last Budget the concerns grew, with a number of changes affecting ordinary individuals, including the unannounced and retrospective changes in the tax treatment of trusts. This does not affect business particularly, but in practice this is the section of the community which is most affected. No one can prove it, but this year some sort of tipping point may have been reached, when a hitherto trusted chancellor is no longer trusted. If that is right, it is very serious indeed.

The second shift in perception has been on the spending side. Contrary to popular perception, business is not against public spending as such. Indeed, one of the complaints that the Treasury kept getting in Brown's early years from business was that there was a huge backlog in infrastructural investment and that the Government had to spend more to claw that back.

Nor is there any ideological objection against the Government's stated priorities of focusing on health and education. One of the perpetual concerns of business is the quality of education of school-leavers, and indeed graduates. Nearly all the growth in jobs has come in occupations that require strong qualifications.

Rather, the problem has been with the effectiveness of spending - the competence with which the funds are deployed. We as individuals see periodic examples of waste, for example in health care, but the business community sees it the whole time in its relations with government. It is not in dispute that the rapid expansion of public spending has led to a fall in its quality, and the Treasury is now trying to push departments explicitly to give better value for money. But its own policy has been part of the problem.

In the next couple of years the sudden surge in public spending will be over. The concern then will be how a Brown-led government, seeking re-election, will cope with this shift in gear. There will be huge ructions, a taste of which has already come from the NHS. One obvious fear is that under more pressure the Government's fiscal discipline, already stretched, will crumble.

Those are the two main concerns, but there may be a third. It is that Britain's long run of relative success, of achieving faster growth and greater stability than almost all other large developed economies, may be drawing to a close. That would be because the combination of the things that made the UK special - relatively low business taxation, a flexible workforce and strength in the booming industry of finance - are now either being challenged or are not so special. There probably is still some advantage, but the margin may be narrower. The Government has been a lucky government, but many business people would say that the margin of advantage is narrower now than it was a decade ago, a judgement reflected in the slipping of the UK on various competitiveness surveys.

It is hard to know how much to make of this. In some areas, including financial services, the UK seems to be gaining global market share. The areas we are getting out of, such as mass manufacturing, we probably would have to cede share to lower cost countries, particularly in Eastern Europe. But there is undoubtedly a sense of unease that, put bluntly, we may not be as good as we think we are. If that is right, then the Government in general, and the Chancellor in particular, will catch some of the blame.

Finally, there is such a thing as the global economic cycle. The UK came through the last one in exceptionally good shape, thanks in part to the strong counter-cyclical budgetary policies of Brown. No one knows when the next downturn will begin, or the trigger that will set it off - my own guess is that such a downturn is at least two years away. But it is easy to glimpse the nightmare: Blair hands over to Brown around the time the world economy takes its next tumble. The political landscape, having changed enormously in the past few days, would then look utterly different again.

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