Outlook: Budget sums lose touch with reality as consumption slows

Rail strife; Property taxes

As Gordon Brown puts the finishing touches to his Budget arithmetic, the economic weather outside Number 11 Downing Street looks ever more ugly. During his Chancellorship, Mr Brown has delivered seven Budgets and as many pre-Budget reports, and, virtually every time, he's had the following wind of robust economic growth. Last year, which was the Big Spend Budget, things were already looking dodgy, but this time around they look a good deal worse. The Chancellor's luck is running out, and his claim to affordable public spending starts to look ever more hollow.

Manufacturing has been in and out of recession for so many years now that nobody takes much notice of it any longer. The news yesterday was that consumption too now seems to be stalling, leaving only turbo-charged public expenditure to keep the economy growing. The CBI distributive trades survey has always tended to be a bit gloomier than the official retail sales figures later show the true position to have been. Even so, if the CBI is even remotely right that retail sales are falling again, then that's a deeply worrying development only partially explained by anxiety about the war.

There may be a wider malaise in consumer confidence, as worries about the impact of higher national insurance rates, which kick in later this week, and the overheated housing market begin to bite. It is not at all usual for long periods of economic growth simply to die of old age. Normally they are killed off by the anti-inflationary policy action of governments and central bankers. That's plainly not the case this time around. To the contrary, the best efforts of central bankers to support the economy with the medicine of interest rate cuts may not be working. The economy here, in Europe and in the US seems to be grinding to a halt anyway.

In these circumstances, the sharp increases in public spending being driven through by the Government may be just what the doctor ordered. But they also need to be paid for, and ultimately they are highly likely to prove inflationary. Already long bond yields are rising in anticipation of the mountain of debt the Government will need to raise to plug the emerging hole in the public finances.

It is generally at this stage in the cycle that the Government's forecasts lose all touch with reality, and so it is proving this time around. In November's pre-Budget report, the Chancellor cut his forecast of growth for this year in a gesture to the much tougher economic conditions he now finds himself in, but only to a still too optimistic 2.5 to 3 per cent. It is already looking as if the economy will be lucky to achieve 2 per cent. But in order to make his revenue and spending numbers stack up over the longer haul, he also jacked up the forecast of growth for next year from 2.5 to 3 per cent to a ludicrous above trend rate of 3 to 3.5 per cent. The rate of growth is forecast to remain above trend in 2005 too.

The Chancellor risks making this a pattern. With each successive Budget, the recovery in the economy and the public finances will be pushed a further year into the future, rather in the same way as it was under Kenneth Clarke. The Chancellor will always be able to claim he meets his own rules for financial prudence because he can make the economic cycle as long as he likes. Mr Brown may have to reconcile himself to the depressingly downbeat refrain of "recovery delayed".

Lower-than-forecast economic growth is one thing. If the present downturn in business and personal taxation turns out to be a deeper, structural phenomenon, then the problem becomes doubly serious. The Chancellor needs to come clean over the true state of the public finances. There is a perfectly respectable economic case to be made for high levels of public spending when the private sector is as flat on its back as it is right now. That case is not helped by pretending that things are much better with the public finances than they really are.

Mr Brown continues to live in terror of being punished by financial markets as a tax, spend and borrow Chancellor out of the old Labour mould. But provided he doesn't wholly let rip, he's not going to be judged in that way. The budgetary constraints emerging in the US and Europe are in any case much more serious than his own.

For whatever reason, the economy is stalling, and if it is not already plain to the Mr Brown that he cannot productively pay for higher spending by raising more tax, then he shouldn't be Chancellor any more. The case for borrowing to spend is much more credibly made if it is also made honestly

Rail strife

More trouble and strife on the railways where Richard Bowker's shiny new franchising initiative has suffered a fearful head-on collision with FirstGroup. Moir Lockhead of FirstGroup thought that when the Strategic Rail Authority's chairman asked him to "pre-qualify" for the new Greater Anglia franchise, he was only being asked to submit his CV, as he is already the incumbent operator on most of the Anglian network. No need to bother with a detailed business plan. That would come later when the SRA set about choosing a preferred bidder.

Mr Lockhead was wrong. His submission has hit the buffers even before FirstGroup could explain all the ways it was going to improve the passenger's lot. The ensuing row can be heard all the way from Victoria Street to the Suffolk coast.

Mr Bowker says the essence of the new franchise policy is to give "greater clarity and certainty to bidders". FirstGroup says it finds the SRA's decision-making process incredible, astonishing and unfathomable. It mutters darkly about mounting a legal challenge, if it can find sufficient grounds for one. Perhaps it could try "misfeasance in public office" which is the charge Railtrack would have stuck on Stephen Byers had he ever been brought to court.

Mr Bowker was not about to let FirstGroup run all over him and yesterday instructed his press office to hit back with a choice selection of insults ranging. The threat of legal action was "pathetic", the submission was "second-rate" and Mr Lockhead was generally depicted as a man whose toys had somehow parted company with their pram.

What the SRA cannot explain is why FirstGroup misunderstood the selection process for Greater Anglia when it evidently had a sufficiently good grasp to pre-qualify for Scotrail and the new Northern franchise, both being let on exactly the same basis. As it is, the SRA has come up with a shortlist of bidders for Greater Anglia which includes the smallest operator on the network (GB Railways), an operator which has publicly declared it wants to reduce its exposure to rail (National Express), and a third which has been kicked off one of its own franchises and criticised for labour relations at another (Arriva).

Mr Bowker may be right to keep incumbent operators on their toes. But to exclude what, on his own figures, is the best train operator in the South-East from bidding for a business it already understands well looks an odd way to run a railway.

Property taxes

The Chancellor is reported to be considering raising the rate of stamp duty on property transactions of more than £1m from 4 per cent to 5 or 6 per cent in his desperate hunt for new sources of revenue. Nobody's going to worry too much about the effect on the higher echelons of the housing market. There are only about 1,000 housing transactions a year that take place at over £1m, and those capable of finding such a sum can presumably afford the hit. Few will shed a tear for the extra £10,000 to £20,000 they will have to fork out. But there's no such thing as a painless tax rise, and the effect on the commercial property market would be much more serious, depressing valuations and stifling activity. Don't do it.

jeremy.warner@independent.co.uk