Small Budget here, great debate elsewhere

Clarke's plans do matter, of course, but what happens in America and East Asia will affect us far more
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The Independent Online
It is nearly Budget time. If you were to believe the standard rhetoric of British politics it is also crunch time for this government: Kenneth Clarke has this one shot - only one because they cannot be sure they will make it to next November - to win the election. He needs to make, so the conventional wisdom runs, the appropriate judgement between the overall tax take and the Government's spending; he needs to deploy any tax cuts that he might be able to scratch together to best political advantage and cut spending to least political disadvantage; and he needs to frame a Budget which is favourably greeted by the financial markets, for that way he can also engineer an early cut in interest rates.

There is nothing wrong with this sort of analysis. Indeed, in the short- term it is the sensible way to see the exercise: as a series of political judgements, with the person making them having to balance conflicting objectives. The most obvious such balance is between taxation and public spending. But there is also the balance between different types of taxation (whom do you hit? whom do you help?) and between different types of public spending (in particular, cash benefits or public services?). And there is the less obvious balance between the level of public borrowing, the Public Sector Borrowing Requirement, and the likely profile of interest rates over the following year. The more the Government borrows the easier the tax/spending equation but, other things being equal, the higher the level of interest rates. Practical question: do voters want tax cuts or would they prefer lower interest rates?

Well, we shall see the Tory perception of what voters want and, in so far as economics affect voting patterns, be able to see the Tory pitch for the next election. In the "new Labour" response to the Budget we will catch a glimpse of the alternative pitch, in particular how different this might be from the old Labour perception of the role of a government.

But this is all a bit unsatisfying, is it not? The differences are quite finely balanced: a few billions of extra spending and taxation; a bit more taken from one group of people and given to another - or maybe even given back to the same people in a different way; and a few billion more of borrowing and plus or minus half a percentage point on base rates.

It is unsatisfying because, as must be clear to anyone who travels about the world a bit or even reads the foreign pages of a newspaper, there are seismic changes taking place in the rest of the world which will affect our future prosperity far more than the odd penny off income tax. There is a grand debate taking place elsewhere about the very nature of government itself, against which our annual Budget is a side-show. What Mr Clarke does or does not do matters on an 18-month view, of course, but on a 5- or 10-year time horizon the tax and spending plans of our government will be much more affected by two other big forces now evident elsewhere. For one we look to America; for the other to East Asia.

The issue in America is the balanced budget. We regard it as normal that the government should have the right to borrow money: to spend money that it does not have in order, for example, to improve services ahead of an election, or simply to cut taxation. People huff and puff at this, and the financial markets exact a penalty in the form of higher interest rates on government debt. But nowhere is it seen as beyond the legitimate role of a government.

Nowhere yet. It is hard to judge at this stage quite how the great debate in the US on the budget will eventually unfold, but the fact remains that both parties there are committed to a balanced budget, and pressure from the Republicans was strong enough to force the US to the brink of default. The US in any case has a much smaller budget deficit (as a percentage of GDP) than any other large developed country and, looking ahead, has the further advantage of a population which is ageing more slowly too. This demographic point is important, for a deficit represents deferred taxation: a liability imposed by the present generation on its children. So quite aside from the practical issue of the need to finance a deficit, there is an ethical issue: what right does any one generation have to impose obligations on a future one?

This sort of moral argument is starting to be heard in the US, and is one of the big forces driving the case for some kind of binding commitment to a balanced budget. If the markets don't force the issue, so to speak, the moralists will.

The import of all this is obvious: if the US really does commit itself to a balanced budget the rest of the world will be driven to follow. A new standard for government behaviour will be established - or rather re-established, for 100 years ago it would be perfectly normal for governments to regard this as a tenet of wise financial management.

The second big idea comes from East Asia. Here the issue is not the right of governments to borrow, but rather the appropriate size of government itself.

Until a few years ago rich countries tended to have a high proportion of GDP allocated by government and considerable regulation of their economic activities. The models varied from country to country: the US and Japan had 30-35 per cent of GDP passing through the state but coupled this with strict regulations; Western European nations had up to 50, maybe a touch more, of the GDP passing though the tax mechanism, though in some ways at least they had fewer regulations than the US or Japan. There were no examples of rich countries where the state played only a minimalist role.

That has changed. New models are emerging in East Asia. For example, in Hong Kong the state plays a small role in economic life. Yet Hong Kong is rich (on some measures richer than Britain) and growing with astonishing rapidity. The wealth shows. People are well fed and well educated, health care is good, and while housing remains very cramped by European and particularly North American standards, the general lifestyle of most people is in other respects similar to that of the other rich parts of the world.

Or take Singapore. There the model is rather different, with a very high degree of regulation of both personal behaviour and in some respects economic life. But in other respects the government stays out of economic activity: taxation and public spending are low.

As the East Asian region develops so that it rivals, and probably surpasses, North America and Europe in economic might, its values, its way of doing things, is bound to have greater global impact. One of the central differences is the balance of responsibility between on the one hand an individual and his or her family, and on the other the state. One measure of this is personal savings. As far as there is a common thread in East Asia, it is that it is a low-tax, high personal savings society. To say all this is not to assert that we have to adopt this pattern wholesale, for we do not. But expect to be influenced.

So, as the hubbub from our Budget fades next week, look for signs that politicians understand these great changes. Look for signals such as comment about the intergenerational impact of still-large deficits, or the need for greater personal savings. Some politicians know all this: Frank Field does; Chris Patten does; I suspect both John Major and Tony Blair do. Not too sure about Kenneth Clarke.

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