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Brown will stick to his rules Samuel Brittan: The Financial Times 21/11/03 A good many financial commentators, together with the opposition parties, have worked themselves up into believing that Gordon Brown, the chancellor, will soon have to admit that he has failed to keep to his own rules for fiscal stability. I am sorry to disappoint, but he will not. The chancellor can be criticised on many counts, above all for his passion for micro-management and his unreconstructed belief - which few of his opponents dare challenge - that health and education must be free at the point of entry. But he is unlikely to throw away his reputation for "prudent" financial management. The Treasury does change its mind, all too often on the basis of dubious forecasts, but it usually puts out smoke signals. One example was before and during the International Monetary Fund visits of 1976, when the markets were given exaggerated hints about more red ink to come in the public accounts. But is it likely that the Treasury would so forcefully and confidently deny any black hole in the public finances, when Mr Brown is due to present a pre-Budget Economic Report on December 10? Or that Treasury officials, not all of whom are Mr Brown's political supporters, would engage in deliberate falsification without this leaking out? I have often made the brilliant remark that there is no way in which public spending can carry on rising at a real rate of 4 per cent per annum, when the trend rate of economic growth is about 2½ per cent. The reconciliation with the chancellor's fiscal optimism is simple. He has given himself some leeway before these arithmetical constraints start to bite, by imposing his earlier expenditure freeze. Moreover, the public spending increases to which he is committed are less big and stretch less far ahead than is popularly supposed. A lot of confusion could be avoided if critics tried to plough through the mass of propaganda, genuine information and forecasts all mixed together in the Budget Red Books. On page 263 (!) of the April 2003 version there is a chart showing the very steep increase in total managed expenditure coming to an end in the current financial year and a much smaller increase from fiscal 2004 onwards. The next public spending planning period does not start until 2006, after the next election. The Red Book made the assumption that from then on the real growth in departmental expenditure limits would average 2½ per cent per annum, plus a small adjustment for the separate settlement for health. You may well doubt whether any government will adhere to such intentions. But the chancellor has already made clear that there can be no reopening of the settlement for fiscal 2005, which is only the year after next; and it is no great scoop to discover that other departments are finding the negotiations for the next spending round very tough. The golden rule that the current budget deficit should not exceed public sector net investment applies over a business cycle, as we shall be incessantly reminded in the weeks to come. So it is still quite likely to be met over a complete cycle running from, say, 1999 to 2005, or any plausible period one likes to take. Of course, the likelihood is that, after the next election, the chancellor of the day will be forced either to curb his party's spending instincts or to find new sources of revenue. If a Labour government adheres to earlier pledges not to increase income tax and value added tax, there is still plenty of scope elsewhere. Never forget the taxation of property, in which both No 10 and No 11 Downing Street are interested. Nor can there be any valid free market objection to taxing pure increases in land value if this can be done without unintentionally taxing enterprise too. How about the overrun in government borrowing in the present financial year? Goldman Sachs, the investment bank, uses forecasting methods similar to those of the Treasury and also has the virtue of exhibiting its reasoning. It believes that public sector net borrowing in fiscal 2003 will reach nearly £35bn, compared with the Treasury's original estimate of £27bn. But it expects this to be a peak figure, both because economic growth is now picking up and because of distortions produced by factors such as the Iraq war. Looking further ahead it expects the public sector debt ratio to stabilise later this decade at just below 37 per cent of gross domestic product. This is above the published Treasury projections, but below the 40 per cent limit prescribed in the second fiscal rule. Of course things will not work out precisely like this; but errors could be either way. My own view remains that spending decisions are best made by individuals and families and that the list of truly public goods is smaller than left-of-centre political economists suppose. But this case needs to be argued on principle.
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