Hamish McRae: So will Gordon Brown be leaving the economy in good hands for his successor?

A reputation that was very good is slipping among the people who are running the economy
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The Independent Online

We have all become so accustomed to a Gordon Brown Budget that today's will seem like just one more episode of a long-running TV serial. There will be the initial paean of praise for the British economic performance and, by association, his own economic management. Then there will be some commentary on how other countries are managing rather less well.

Next there will be the economic forecast, which will have lots of threes in it: 3.5 per cent growth in the next two years and so on. Then there will be the fiscal figures, with large and important numbers such as state borrowing and overall tax revenues bundled out in machine-gun style, and small and less important (but favourable) ones documented in detail.

That will be followed by the fiddly stuff. There will be stuff about making Britain more competitive, stuff about improving the efficiency of the tax system, of public services, of the distribution of "help" the Chancellor is giving. There will be some cute tax increases which only companies or the rich will supposedly notice. There will be tax loopholes to close and tax incentives to open. And there will be the overarching confidence of someone who really believes he is doing this job well enough to justify doing another one soon.

Politics give this Budget speech a special zing: could it be his last? But, save in the very short term, budgets are about economics rather than politics. As his term of office draws towards an end, the thing we really want to know is whether Gordon Brown is leaving the economy in good nick - or whether he is leaving something nasty in the woodshed for his successor and the rest of us to discover.

There seem to me to be two big questions that people listening to the Budget should have in the back of their minds. One is whether the price paid for a stable growth performance has been too high: too much borrowing, passing on too big a burden to future generations. The second is whether the balance between public services and private consumption is what the country as a whole wants: have we obtained real value from what is probably the fastest increase in public spending that has ever occurred in peacetime?

We won't get answers on either question today. What we will get is hints that will guide us into a judgement, a judgement that we can draw on by the time of the next general election. I can see five things to look for today, five hints about the Chancellor's performance.

The first is the growth forecast. As you may recall, last year's Budget grossly overestimated the growth rate of the country for the rest of the year. It suggested growth would be more than 3 per cent, and it turned out to be less than 2 per cent. Unsurprisingly, the Budget numbers also turned out to be correspondingly worse than expected as well. The thing to look for now is whether future forecasts are credible; not whether they are good or bad but whether they are more or less consistent with independent forecasts. If not, amber light.

The second is taxation revenue forecasts. So far, tax has not risen much as a percentage of GDP during Gordon Brown's chancellorship. The reason is that the tax-gatherers have found it very hard to raise the money. Consistently, year after year, revenues have come in below the amount cited in the Budget. This year will be no exception.

The reason is that while there have been lots of new taxes - pension funds, airfares, oil company taxation and so on - these are quite small. Even inheritance tax, which has produced more revenue on the back of the rise in house prices, is small: less than £4bn. The problem is the big taxes, particularly income tax and VAT, not the small ones.

So the thing to look at is future projections of revenue. Do these take into account recent shortfalls and is the over-optimistic tone tempered. Or does the Treasury find it hard to accept that it is running into tax resistance?

The third issue is employment. The official figures have shown a steady rise in unemployment, as measured on the claimant count, with the very latest ones being particularly disappointing. But I always think that employment is a more helpful figure than unemployment and, in particular, private sector employment. (Public sector employment does not help the Budget numbers.) So the matter today is whether the Budget is likely to increase private sector jobs or to decrease them. It will have to be an intuitive judgement but it is something that matters enormously when making an assessment of the Chancellor's performance. If the job machine falters, demand will fall as well as tax revenues, and things could get much more difficult.

If the country needs jobs because of the need for revenue and consumer demand, a lot of individuals need jobs because they have debts to service. Test number four is whether there is any sensitivity to the huge burden of debt that individuals and families are carrying. Budgets are not about personal borrowing; they are about public borrowing, and of course monetary policy is with the Bank of England. But the burden of private debt is something that the Brown years will bequeath to a successor in the sense that it surged on his watch. I would like to see something there at least showing awareness of the issue.

And finally, issue five is the competitiveness of the nation. Here Gordon Brown talks the talk but arguably does not walk the walk. There will be a lot of stuff about this today. What would be nice to see is a sensitivity to the falling productivity of the one bit of the nation that the Chancellor does have under his direct control: the public sector. On his own calculations, a large part of the increase in public sector output will have to come from increased efficiency, but that means a turnaround in past performance. See what he says.

Meanwhile, apply a credibility test to any measures designed to improve private sector productivity. There is a problem and it is an extraordinarily complex and intractable one. What we have to figure out is why the US, unlike every country in Europe, has been brilliant at applying the new technologies to boost output. Why has productivity surged in the US and not here? No slogans, no hectoring, just some thoughtful comments, please.

If I were Gordon Brown, I would be worried about two things. One is the shortfall in revenues. The other is the rising hostility of the business and professional community. The first is a "hard" problem: the numbers are turning out wrong. The second is a "soft" problem: a reputation that was very good is now slipping among the people who make the myriad practical decisions on running the economy. They are cautious at the moment. If they really start to lose confidence, this whole term of the Government will run into the sands.

Hamish McRae has been named Business and Finance Journalist of the Year in the British Press Awards