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Why this should be the last 'Budget' Samuel Brittan Financial Times 23/03/07 Gordon Brown's 11th and surely last Budget does little to change one's verdict on his stewardship of the British economy. He has provided an impressive framework of macrostability with low and stable rates of inflation and 58 quarters of continuing economic growth. I sometimes wish he would acknowledge that he was building on foundations laid down by his predecessors. But one cannot ask somebody to act against his nature. As against his macro performance must be set his control freak tendencies to try to influence, whether by tax, subsidy or regulation, every nook and cranny of our lives. Lord Keynes once drew a notable distinction between the "agenda" and "non-agenda" of government. The dividing line must change with circumstances, but the present chancellor shows no sign of appreciating that such a line exists. Why, in the face of excessive intervention, has the underlying British growth rate not suffered? Here is where it becomes interesting. Table B2 in the Budget Red Book contains an analysis of trend output growth. In the last Conservative decade, ending in 1997, it is estimated to have been about 2.5 per cent per annum. It is now put at 2.75 per cent. But the main reason is the change in the growth of the population of working age. This averaged 0.2 per cent in the Conservative period, but has now risen to 0.6 per cent. A large part of this is recorded immigration. Take away this factor and trend output growth shows almost no change. Some Treasury officials have long believed that there is an underlying growth of output per hour of just over 2 per cent per annum that politicians can do little to shift. Or, as Mr Brown's new friend, the economist Adam Smith, said: "There is an awful lot of ruin in a nation." Many listeners were initially puzzled by how Mr Brown has paid for the surprise cut in the basic income tax rate. But it was soon clear that this has been offset by the abolition of the 10 per cent lower rate and the overdue unification of the National Insurance threshold with the upper tax rate starting point. The cut in the main rate of corporation tax is offset by capital allowances changes. But there is a bit more to say. Little bits of largesse are scattered throughout the Budget document, ranging from special investment allowances for small companies to improvements in tax credits. The two words that should be repeated over and over again by any budget commentator are "fiscal drag". This refers to the automatic increases in revenue from a slightly progressive tax system as incomes grow. This has enabled the chancellor to raise both the public expenditure proportion of gross domestic product and the tax ratio without introducing anything like "tough budgets". But he sees limits to how much of this stealth the public can take, as projections show a levelling off from 2008 onwards. There is one more macro point to make. Argument is sure to break out on whether he really has observed his own first golden rule of financing current spending from current revenue. The weakness of the present method is that the balance aimed at is for a whole economic cycle, the definition of which keeps changing. It is absurd that the permissible budget deficit today depends on whether the present cycle began in 1997 or some other year. Why not try a simpler method? Aim for a current balance but allow a deficit in recession years and do not give away the whole of the surplus in periods of boom. There will still be questions of definition but they will be a little less arcane. Finally for my seemingly heretical, but really commonsense, suggestion. Now that Mr Brown has had his fun with 11 Budgets, if he becomes prime minister he should ensure that these are the last of the present series. In most countries the budget is a statement of public expenditure plans. This is most conspicuous in the American case, where approval by Congress of neither the spending nor the tax side can be taken for granted, even if the same party is in control there as in the White House. But we do not have to adopt the whole US system of government. I am simply suggesting that the three-year public expenditure review this autumn should be regarded as "the Budget" with some indication of whether the Treasury thinks it can be financed at existing tax rates. There will obviously then be adjustments in each of the succeeding years, but the process will resemble much more what a company or a family thinks of as a budget, without the razzmatazz. Major changes in the tax structure would then come in separate tax management bills, whenever they are required, after full and public discussion and not necessarily once a year. The chancellor could, if he needed to, still make adjustments in tax rates at any time if he has wrongly estimated fiscal needs. These are not original suggestions. Some have been made by many committees and have attracted frontbenchers, such as Geoffrey Howe, when in opposition. But it can be necessary to state the obvious.
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