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Statement to House of Lords Economic Affairs Committee Samuel Brittan: March 23, 2004. My Lord Chairman, It might help the committee if I give a general reaction to the economic policy framework presented in the 2004 Budget. I have never believed that there was a "black hole" in the government's fiscal plans. They are based on the supposed economic cycle 1999-200 to 2005-06. Thus there is only one more year to go after the coming one. There is an ample margin of manoeuvre on the first fiscal rule that the debt to GDP ratio should remain below 40 per cent - thanks to low borrowing in earlier years. It will be touch and go whether the Chancellor can fulfil the second rule, the "golden rule" that current deficits should not exceed public investment, again over the cycle. But even if he just misses this golden rule, it will be by a small fraction of one per cent of GDP, and the UK will still be in a much better fiscal position than nearly all the Group of Seven industrial countries. (My guess is that if stressed, the Chancellor will find small technical adjustments on either the revenue or the spending side to stay just within it. This will give the Treasury's first class brains something to occupy themselves with!) It is highly likely that he can get through until the next election, whether that is in 2005 or even delayed until early 2006, without tax rate increases. The controversial question is: what happens afterwards? Can he deliver his public expenditure undertakings for later financial years in the next Parliament without having to increase tax rates or introduce new taxes? The widespread cynical view is that he has simply postponed such increases until after the election. But pure cynicism is usually much too simple. I suspect that his advisers, in their heart of hearts, believe that there is a sporting chance that they will get away with it. So why talk about tax increases which, with a bit of luck, might not be needed? There is of course some "fiscal delusion" here. If you look at the tax chart, Chart C3 on page 262 of the Budget Book, you will see that the ratio of tax to GDP is expected to rise from its recent low of 35½ per cent to over 38 per cent in the next few years. This will take it to the levels prevailing in the early and middle 1980s, which the Conservative government tried so hard to reduce. This is due to a process sometimes called "bracket creep". The tax take increases automatically in an average year because of the effect of rising incomes on a progressive tax system. Reductions in tax rates are required merely to keep the tax burden from rising. The real government claim is that it can get away with bracket creep alone. If you simply look at the aggregate decisions for planned expenditure it probably can. You will see from Chart C4 on page 267 that managed expenditure actually fell as a proportion of GDP during the present government first few years of office to below 38 per cent of GDP. This was due to a decision to stick with the cash expenditure plans of the outgoing Conservative government for the first couple of years in a very literal-minded way, and also to savings on debt interest and allied items which arise from lower inflation and interest rates and which are by their nature once for all. We are now coming to the end of a period of sharply rising public expenditure. The Chancellor is planning for an average annual increase of 2½ per cent in real terms in current spending in line with a so-called "cautious" estimate of UK growth potential. The public expenditure ratio is expected to flatten out near 42 per cent of GDP by 2005-06 and remain there for the following two years. There is nothing unbelievable about this in the aggregate. A government can impose limits on the public expenditure bill. The controversial question is whether it can combine these "prudent" limits with the planned large increases in health and education, (health to rise by 7.2 pc p.a. 2007-08 and education to creep up as a proportion of GDP) together with a refusal to freeze other sensitive items such as security, defence or transport, in nominal or even in real terms. Let me list the main areas where things could go wrong. I leave out conjunctural events such as world recessions in the spirit of looking at a whole business cycle as the government would like us to do:- The Treasury projections assume that there is still a margin of slack in the British economy or a negative output gap of about 1½ per cent of GDP. The Bank of England and other analysts on the other hand suspect that there is almost no usable access capacity in the economy. The government assumes that tax yield will recover and resume its normal relationship with GDP. This is debatable. A good deal hangs on the success of the government's anti-tax avoidance measures, which I would have preferred not to cash in on in advance. Most important of all are the administrative savings which are supposedly to reach, eventually, £20bn-per-annum or nearly two per cent of GDP. It is from this margin that the government hopes to obtain the resources for expanding health and education without an overt increase in taxes. This is not the time, and I have not the expertise, to examine the planned managerial improvements. But I have to admit that when spokesmen of both main political parties are forced to rely on administrative savings to fulfil their promises they are pretty well scraping the barrel. Finally a word about presentation. A great deal of hard work has been put into the Budget document (formerly "the Red Book", now red on white) by officials of all political persuasions and of none. But it risks being overlooked or dismissed because of the way it is set out, full of tendentious terminology, self-praise, repetition and other kinds of padding. (More like Classic FM than Radio 3). The main Budget Book is now 296 pages long, before taking in the satellite documents, three times what it was ten year ago. May I illustrate this in relation to Table 1.1 on pages 12-13 which summarises the main Budget decisions. Exactly the same table is repeated word for word on page 186. But that is not the worst of it. Supposing you want to know about VAT thresholds - you have to look that up under the heading "meeting the productivity challenge". If you want decisions on housing benefits you have to look under "increasing employment opportunity for all". For such a basic part of the Budget as the Chancellor's income tax decisions, you have to look at "building a fairer society" and under sub-heading entitled "supporting families and pensioners" and so on, and so on. (As for the Budget Speech, amidst the plethora of data, the Chancellor did not mention such old hobby horses as the balance of payments or manufacturing. Imagine what he would said about them if he had been Opposition economic spokesman!) If members would like to see a more readable and logical presentation of government economic strategy they might look at any of the reports of the American President's Council of Economic Advisers, irrespective of whether the president is a Republican or a Democrat. Of course the general orientation differs from president to president. But the US document lacks the self-praise and tendentious terminology and over partisanship of the British Budget Report. It is moreover far easier to find your way around it, helped as it is by an excellent appendix of key economic data going back many years and prepared on a non-partisan basis. The Government is committed to a national campaign against obesity. It might start its campaign with its own Budget documents. In short the size of the Budget statement has increased,is increasing and ought to be diminished.
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