Prudent it ain't. Gordon Brown is betting that Britain can offset the worst effects of the global slowdown by borrowing its way out of trouble. If it comes off, this country may continue to outpace most of continental Europe and Japan and the Government's spending programme will be secured. If not, then in a couple of years' time, the Government will hit a wall. The Brown boom will meet the fate of the Barber and Lawson booms of the 1970s and 1980s.
There are plenty of reasons why the Chancellor should try to stick to his spending plans despite the sudden and serious fall in tax revenues indicated yesterday. Thanks to the surpluses of the past, the Government's credit is good; by world standards the increase in borrowing seems acceptable; it does not make sense to make big cuts in spending at this stage of the economic cycle; the UK economy is still performing well by world standards.
But the fact remains that the borrowing this year needed to stick to those spending plans has nearly doubled from the estimates of the spring, and – if you believe these estimates now – will rise to more than 2 per cent of GDP next year.
By ploughing on, Mr Brown is taking three huge risks. The first is that growth will not recover next year as he hopes. The second is that the fall in tax revenues is not just the result of slower-than-expected growth but something more fundamental. And the third is that much of the spending is being wasted.
Growth first. Let's forgive the Treasury for getting its forecast of growth this year wrong by nearly three-quarters of a point. But let's just be a bit cautious about its mid estimates of 2.75 per cent for 2003 and 3.25 per cent for 2004. If there is to be a sustained world recovery, those numbers are credible. If there were only a meagre recovery, they are not. Slower growth increases public spending and cuts tax revenues. The cut in tax revenues seems to be the main reason that the Treasury is now expected to borrow £20bn this year against the £11bn it expected five months ago. If that fall in revenue were simply the result of slower growth, then a pick-up next year would start to correct it. But tax revenues may continue to disappoint. It is possible the share boom artificially inflated receipts, and if the housing boom is ending, that would further cut revenues.
The very factor that enabled the Chancellor to increase spending with limited tax rises – unexpectedly strong revenues – now seems to be going into reverse. For one year we can borrow our way out, but we cannot do this for two or three or four. This was the man who two years ago was predicting only a tiny slide into deficit. A deficit of 2 per cent of GDP would be acceptable if that were indeed what was going to happen. But it is based on optimistic assumptions of growth and, as far anyone outside the Treasury can see, makes insufficient allowance for the sort of tax shortfall that is already evident.
The irony is that it would make sense to roll out the increase in public spending more carefully. Anyone who has much contact with the spending departments reports that the taps have been turned on suddenly, for spending is up by more than 10 per cent year-on-year. Since a lot of that is pre-determined, this means that discretionary spending is up by even more. Public sector employment has shot up and, if the Government is not careful, public sector wages will too.
Mr Brown is troubled that the additional money is not being spent as effectively as it might, hence the repeated mentions of auditing and the need to obtain value for money. If he were wise he might use this as an excuse to slow down the increased spending. But yesterday he seemed determined to plunge on.
He may get away with it, and we should all hope he does. But don't pretend it is prudent. It is a gamble – and staked with our money.
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