Outlook: Budget surpluses

Outlook: Budget surpluses

ONE OF those pleasingly familiar British rituals seems to be happening before our eyes again. The Chancellor of the Exchequer, getting a warm feeling about the good behaviour of the economy under his wise guidance, announces there is greater potential for growth. However, aware that there is a link between sensible economic policies and a favourable economic performance, he insists there will be no let up on tough controls of the public finances and the battle against inflation.

Gordon Brown would do well to revisit Nigel Lawson's memoirs, and read up on the period leading up to the boom of the late 1980s. Headline inflation was low, producer price inflation at its lowest for decades. Growth was picking up after a pause and unemployment was falling. The one cloud forming on the horizon was a surge in London house prices. Still, real interest rates were high and the state of the government finances was improving rapidly.

During the subsequent boom, the government went on to enjoy a surplus of revenues over spending in four successive years, from 1987/88 to 1990/91. Eventually the Chancellor succumbed to the desire to cut taxes dramatically, a political priority for the Conservative government. Initially the impact was partly offset by tough spending controls, but these too were relaxed ahead of the 1992 election.

Gordon Brown has rather different political imperatives and he is under pressure from Cabinet colleagues to use the unexpected fiscal bonanza to increase spending on key public services. In another bit of much-loved ritual, he is firmly resisting their raids on the likely budget surplus. "Tough" was the word he used most frequently in the speech in New York.

With time, the Chancellor will no doubt find he does, after all, have the cash for a few spending pledges. But he is right to resist an all- out assault on the fiscal rules and the three-year spending plans he has set for himself. Tax revenues and spending are highly sensitive to the state of the economy. The pattern is one of surprisingly large surpluses during booms and equally unexpected deficits during busts. Lord Lawson found his four years of surplus transformed (under his successors) to the biggest deficits since the mid-1970s.

This is precisely the point of setting the "golden rule" (that the government can only borrow to invest) for the course of an economic cycle. It recognises that surpluses are needed in good times to offset deficits in bad. Mr Brown's supposed warchest will vanish faster than summer snow when the economy eventually slows. His cabinet colleagues would do well to remember this as they hammer at his door for the lid to be lifted on public spending.

Outlook@independent.co.uk