Mr Brown will be judged by his funding of public services - and found wanting

The top-down Treasury control system cannot deliver. Another Chancellor another time will have to figure out an alternative
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The Independent Online

The glory days are over; it is tough times now for Gordon Brown. Today he will introduce the pre-Budget report, the first stage of the Budget proper in the spring. Since the Chancellor's practice is to pre-announce a large number of the measures that will take effect next year, this will give us a very good flavour of what is in store for us.

The presentation tomorrow takes on a special significance for two reasons. One is that it is quite possible that this will turn out to be his last pre-Budget report. Were Tony Blair to step down in the next few months, Mr Brown would either get the top job or decide to do something else.

The other is that this will be the second time that his sums are turning out to be wrong. Tax revenues are coming in several millions below his spring estimates despite the fact that the economy has continued to grow reasonably swiftly. And spending, partly as a result of the Iraq war, but only partly, is running above plans.

Last year much the same happened and the Chancellor ended up borrowing more than he first thought and had to bring in an unexpected rise in National Insurance Contributions to cover the gap. Now he is in danger of having to do so again. He won't yet fully know how serious things will turn out to be as we are still only a little over halfway into the financial year, but he will have to give some indications. And these new numbers will be scrutinised even more closely than the last set, for the financial markets from which he has to borrow to cover the gap know that something is up.

The judgement of the financial markets matters, particularly when governments need to borrow, but at the moment the judgement of the punters who pay the tax and receive the government services matters more. During his first term of office the Chancellor was wholly credible. People might not agree with the detail of what he was doing: after a while the voters began to cotton on to stealth taxes. But the broad thrust of his stewardship was widely praised. The issue now - which will determine how Mr Brown is remembered as a Chancellor - is whether that favourable judgement can also be applied to his second period as Chancellor.

That is the essential background to today's speech. What tests should we apply? I suggest we should use the tests that Brown himself would apply, not his "golden rules", which are really rather technical, but rather his broad objectives. These include the end to boom/bust, putting finances on a sound basis, promoting both enterprise and social justice, and making available sufficient funds to make a material improvement to public services.

On the first test there can be little doubt that Gordon Brown will be remembered as a success. The curse of British economic management since the Second World War was stop/go. Policies that were supposed to stabilise the economy had the reverse effect. The late Eighties boom and the early Nineties slump were just the last of a long line of macro-economic errors. As a result Britain had more marked swings than most other developed countries, causing misery and unemployment and probably damaging its long-term growth.

Well that is history. Expect Gordon Brown today to stress this achievement and he will be absolutely right to do so. We have come through this cycle in better shape than any other large developed country. As a result, employment has continued to rise and unemployment to remain very low.

To a large extent this achievement was the result of his early decision to give the Bank of England freedom to set interest rates, but it is not just that. Fiscal policy, particularly in the first term, has played its part too. Mr Brown deserves respect on both counts.

Putting finances on a sound basis? Again, there is a clear credit, though with a small question mark against it. The Chancellor used the strong revenues in his first term to pay back debt. He was lucky in that the boom boosted the tax take, that falling world interest rates cut the cost of borrowing and the 3G telephone licenses brought in a windfall of nearly £30bn. With hindsight he should perhaps have creamed off even more of the extra revenues in the good times, holding down the growth of spending and paying off even more debt. Had he done so he would be in a stronger position now. But it has been a perfectly reasonable performance.

Using tax and benefits to promote social justice and enterprise? Here the Government has made a useful start in correcting some of the illogical and inefficient aspects of the benefits system. And it is not just the Government's word for this. Independent observers such as the JW Rowntree Foundation have noted that there has been some narrowing of post-tax differentials and that there has been a welcome reduction in child poverty.

Whether there has been similar progress in fostering enterprise is more doubtful. There certainly was a boost to enterprise in the late-Nineties but this was worldwide and had more to do with the internet boom and the opportunities for small businesses from outsourcing than this Government's initiatives. Recently there has been a surge in self-employment but this may be the unintended consequence of the rise in NICs: companies have trimmed their payrolls to cut costs and people have become freelancers instead.

But it is on the final issue - making available the funds to improve public services - that the Chancellor may turn out to be most severely judged. He has made the funds available to be sure. The effects have been increasingly disappointing. Any early lack of improvement in public services could be put down to tight spending controls. But that is not now a credible excuse, for money is now self-evidently being wasted in a huge scale. One simple measure of waste is that inflation in the public sector is now running at more than 7 per cent.

Should the blame for waste by the spending departments be put on the Treasury, which after all, only supplies the money, albeit on tight terms? The professionals in the Treasury are tearing their hair out over the failure of the departments to deliver on their promises. But they feel powerless, for their attempt to micro-manage spending has proved an impossible task. Auditing afterwards merely shuts the stable door after the horse has bolted. The sad truth seems to be that the Treasury only has authority when it is saying no. When it is encouraged by the Chancellor to say yes, inefficiencies soar.

So the big increase in public spending has been a failure. Just how big a failure remains to be seen - history will judge that. But there is a personal danger for Gordon Brown that he will be remembered for this failed experiment rather than his considerable achievements. Of course people are right to want better public services and many are prepared to pay higher taxes to fund them. But the top-down Treasury control system cannot deliver. Another Chancellor, another time, will have to figure out a more effective alternative.

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