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Brown's real Budget challenge Samuel Brittan: Financial Times: 12/03/04 The real UK Budget will come not next Wednesday but with this summer's public expenditure review, which will set the government's fiscal plans for well into the next parliament. It is in this context that the big decisions will have to be taken, both on the composition of spending and on how it is to be financed. As I have long said, Gordon Brown will be able just about to meet his fiscal rules within the rather arbitrary period, 1999-2005, that he has set himself. Meanwhile I see no reason to dissent from the consensus verdict on the performance of the British economy during the seven years of Mr Brown's stewardship. He has achieved an enviable record in macroeconomic stability, but he has offset this by a lot of fussy interventions on the micro side that, if anything, hinder his professed goal of boosting productivity. The chancellor has published this week a justificatory tome, Microeconomic Reform in Britain. It has two underlying weaknesses. First, there are undoubted market failures in the private sector; but there are only token references to equally important government failures. The two need to be considered together. Second, there is no recognition at all that a mass of interventions, each justifiable in its own right, can be counterproductive in its total effect. Nevertheless, much of the criticism of the economy's overall performance is misguided. It is often said that the UK is suffering from a galloping consumption boom, based on debt. It is true that over the six years 1997-2003 real household consumption did rise by just over 1 percentage point a year faster than real gross domestic product. But now look at the matter in nominal terms - that is, the kind of money that you and I pay over the counter. You will then find there is much less discrepancy. Indeed, in the two years up to 2003 consumption in money terms rose by an estimated 4.5 per cent per annum - rather less than nominal GDP, which grew by 5.2 per cent. This obviously reflects a lower rate of price increase in the consumer sector than in the rest of the economy, to do with improving terms of trade and other fortuitous items. If - or rather when - luck turns and consumer income is squeezed, so then will be consumer spending, and the famous imbalances removed - but only if sterling continues to float. If you want something to worry about, look instead at "government consumption". In the period 2001-2003 it rose by a cumulative 21.1 per cent, while GDP rose by 10.7 per cent. If we want to boost public services, we shall have to pay more to recruit and retain those who work in them. How about the debt mountain and the house price boom? The best analysis is that of the Organisation for Economic Co-operation and Development. This emphasises that, although the ratio of house prices to incomes is near a record, the debt servicing burden is very much less thanks to low inflation and interest rates. The OECD does indeed recommend a gradual rise in short-term interest rates; but this is because it envisages a rate of overall economic growth substantially above trend, starting from a position with very little usable excess capacity. The OECD also considers an alternative boom-and-bust housing market scenario. Consumption then does indeed receive a severe shock in 2005, but the ultimate effect, given sensible monetary reaction, is just to take half a percentage point off the GDP growth rate in one year only. A first-class discussion of the real fiscal problem facing the chancellor is provided in a paper entitled "Tough Choices", by Peter Robinson of the Institute for Public Policy Research. It is far better written than the Treasury Red Book. The IPPR document shows that the Treasury has already decided to treat the present burst of rapid public sector expansion as a once-for-all catching-up. Projections already published show public spending levelling off from 2004-2005 at about 42 per cent of GDP. It is most unlikely that the chancellor will risk reopening this "envelope". Within this, the planned rise in spending on medical services (sorry, I mean "health") has been ring-fenced. This means that everything else, including education, will have to be either frozen or reduced as a percentage of GDP. At the end of his analysis Mr Robinson doubts whether the sums can be made to add up, in view of the spending pressures. He might personally like to see a higher tax take; but he neither predicts nor even advocates this. As a person of generous ideals, he finds the prospect upsetting. I can only suggest he launches a fundamental zero-based review of which services should be in the public sector and which financed by citizens from their own pockets, and also of the relative role of taxes and charges. Such fundamental rethinking will not help the government or even the opposition in 2004, but it is needed.
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