If Gordon Brown is wise, this will be the last Budget he presents to the nation

In four or five years' time, I suspect that the verdict on this Chancellor will be rather less favourable that it is right now
Click to follow
The Independent Online

It is, to use the buzz-words of the moment, time for Gordon Brown to "move on" - and only partly for the much-discussed reason that, were he to stay in the job, he would have to increase taxes after the election to pay for all the extra spending. That is part of it, to be sure, but there are several other reasons why the task of the Chancellor in the next parliament will be much more difficult than that faced by Gordon Brown in the past two. So it would be a wise time to get out.

It is, to use the buzz-words of the moment, time for Gordon Brown to "move on" - and only partly for the much-discussed reason that, were he to stay in the job, he would have to increase taxes after the election to pay for all the extra spending. That is part of it, to be sure, but there are several other reasons why the task of the Chancellor in the next parliament will be much more difficult than that faced by Gordon Brown in the past two. So it would be a wise time to get out.

Today's Budget is a holding exercise. There will not be any big macro-economic message, any big tax cuts or, indeed, any big new spending measures. It won't be a "giveaway" Budget because that would not be credible. Instead, there will, as always, be lots of self-congratulation, a few small tweaks to the tax system and a host of tiny new spending initiatives, some of which have already been foreshadowed, plus a couple of new ones that are crafted to be vote-winners. For this is not really an exercise in economics; it is one of politics and, given the proximity to the election, that is fair enough.

Still, there are three main reasons why this would be a good time for Gordon to find another job. The first is that the Chancellor's greatest success, giving the country macro-economic stability, has been achieved at a cost that will become increasingly evident. The second is that there will soon be a squeeze on public spending, even on the Treasury's own figures. And the third is that the present growth phase of the world economic cycle will almost certainly come to an end in the life of the next parliament.

Give or take a year or so, world economic cycles seem to have an eight year life. Gordon Brown took over the job half way through the 1990s' growth phase. He then, with the help of the Bank of England's monetary committee, managed the economy through the post-Millennium flop. This was very successful. Rate cuts by the Bank, coupled with a switch from surplus to deficit by the Chancellor, gave enough of a boost to demand to enable the country to pull through the downturn without a single quarter of negative growth. This has been a huge achievement, and the Chancellor and the Bank deserve real credit for this.

But there is a price. The Bank has kept demand up by using low interest rates, at least until recently, to boost personal demand. The result has been another housing boom and a surge in personal indebtedness.

At some stage, house prices will need to fall relative to incomes - and the current debate is whether there will have to be an actual decline in prices, or whether they will remain much where they are now for two or three years while incomes catch up. And at some stage, people will need to rebuild their savings and curb their personal borrowings: savings are well below their long-term average, while borrowings are at an all-time high.

Some sort of adjustment has begun in the housing market, but it is still not clear whether there will need to be another rise in interest rates to curb personal borrowing. What is, however, clear is that the credit-fuelled spending boom is, one way or another, coming to an end.

So, too, is the public spending boom. People can make their own minds up about the effectiveness of the additional public spending that has been pumped into the economy. That is a political judgement and one on which voters will have the opportunity of exercising at the general election. What is not in dispute is that the big growth of public spending is over. It will, on the Treasury's figures, rise from now on more or less in line with national income. Some sectors will be protected, such as health, but others will be squeezed. According to the Chancellor, the output of the public sector will continue to rise but that is because of increased efficiency: the transfer of resources from administration to the front-line.

That may seem an admirable aim, for what could possibly be wrong with extracting more efficiency from the public sector? But in practice, it is tough, for it means putting pressure on people to do more with less. Expect more unrest among public sector workers in the future, unrest for which the Treasury - which under Gordon Brown has increasingly tried to micro-manage the other departments - will get the blame.

To predict that a squeeze will now happen is not to make a value judgement about the case for or against more public spending or, indeed, whether there will need to be tax increases just to pay for present spending plans. It is simply to point out that the surge in public spending was a once-and-for-all rise that is now over. At no stage in the foreseeable future is public spending likely to increase as quickly as it has in the past five years. That change in expectations will make life difficult for the next chancellor.

Finally, there is the change in the world outlook. It is important to recognise that last year saw the fastest global growth for nearly 20 years. We are in the middle of a world boom, and the UK, as an open economy, has both benefited from this and been part of it.

At some stage, this boom will run its course. It is already showing signs of strain, for it has been driven largely by American consumers, with the resulting huge US current account deficit, financed by borrowing from abroad. But we don't know how and when it will end. The "how?" trigger might be a surge in the oil price; or it might be a rise in global interest rates. As for the "when?", on past form you might expect the boom to end about 2008, but, looking at the fragility resulting from the present imbalances, it could be earlier. I suppose it might run on through the next four years but I think that is unlikely.

So the next slump is likely to occur on the next chancellor's watch. But the next chancellor will find it hard to acquire the war-chest built up by Gordon Brown during his first term of office. So it will be harder to offset a fall in demand by increasing borrowing because of the deterioration of public finances in the past three years. And the Bank of England will not be able to create another housing boom and pump up demand that way.

Result? We may well come though the next downturn in an OK shape, but it would be reasonable to expect a year or so of very slow growth. Indeed, in four or five years' time I suspect that the verdict on Gordon Brown will be rather less favourable than it is right now. His will, I suspect, be seen as a chancellorship of two halves: a first term in which he did most of the things right - although he may have squeezed public spending too hard - and a second where he made serious errors, leaving a series of time-bombs that exploded after he had left office.

But that is all to play for. His task today is simple: construct a steady-state Budget that doesn't worry anyone. This is not the time for a big bang. Instead, he has to convince people that he really has been prudent, when he hasn't quite lived up to his own standards. And he has to persuade taxpayers that they really are getting, and will continue to get, value for their money. Then he has to think of something else to do - whatever that might be - with the next stage of his life.

Comments