20 April 2007
He's a 'Stalinist', grumpy, tax-and-spend loner who has suppressed public sector wages, hidden national liabilities and pillaged our pension pots. Chancellor Gordon Brown this week even faced a parliamentary no-confidence vote over his judgement.
But while the political flak flying around Brown in advance of his likely promotion to prime minister has focused on his supposed character traits, his ten-year stewardship of the UK economy gleans ringing endorsements from independent sources.
Brown would have taken solace from last week's assessment from the International Monetary Fund, the world's financial watchdog, which largely endorsed his upbeat assessment of the UK economy.
The IMF's bi-annual World Economic Overview, published on April 11, praises the government's fiscal management and economic growth planning, welfare and employment programmes, improved productivity and reaction to globalisation.
It follows similar praise from the Organisation for Economic Co-operation and The Economist, and was timely: Brown flew to the IMF's headquarters in Washington to meet his admirers at a global finance summit last weekend.
He could bask in the fact that the fund has revised upwards its prediction for UK economic growth in 2007, from 2.7% to 2.9%, which takes the IMF's expectation into the 2.75% to 3.25% range predicted by Brown.
Following a stark 0.7% revision downwards in expected US growth (and bearing in mind the adage that 'when the US sneezes, the rest of the world catches a cold'), some experts had claimed that Brown's estimates were ambitious. It's not the first time that the chancellor has proved the sceptics wrong, the Treasury noted this week.
'The UK economy is expected to continue growing robustly in 2007… given bullish confidence, rising house prices, improving employment and productivity, and record corporate profitability,' the IMF report states.
Despite this week's furore over inflation, the IMF even suggests that Brown's Consumer Price Index target of 2% – on which his controversial 2% public sector pay rise cap is based – could be achieved this year, albeit following further interest rate rises.
The fund's praise of the government's welfare and labour market strategy is interesting. Brown, Prime Minister Tony Blair and Work and Pensions Secretary John Hutton have endured domestic criticism for imposing extra conditions on future welfare payments. Plans to push 1 million Incapacity Benefit recipients and a million older workers into the labour market to achieve Brown's 80% employment target have also come under fire.
But the IMF's evaluation lauds the UK as an 'impressive' blueprint for employment strategies and welfare reform. The fund claims that the UK, Netherlands, Ireland and Denmark stand out as having successfully tackled embedded problems with unemployment over the past two decades 'in a manner that was both internally consistent and consistent over time'.
The tool used to achieve this, the IMF says, is 'wage moderation'. In particular, 'reducing government employment or government wages' – Brown's infamous 80,000-plus job cuts and his 2% public pay cap – have contributed to wider economic benefits, the researchers claim.
Brown has achieved wage moderation through a variety of measures, including 'changes in the attitudes of unions and workers'. Despite opposition from some civil service trade unions (the ongoing dispute with the Public and Commercial Services union, for example), the public sector workforce, as in the private sector, has been largely accommodating of tighter pay settlements in recent years.
Trades Union Congress head of economic and social affairs Adam Lent agrees. He told Public Finance: 'No doubt the factors identified by the IMF may have played some role in maintaining steady wage settlements. Clearly, one of the biggest changes in that period has been the major strategic shift within the union movement to working in partnership with management on pay.'
Another reason why embedded opposition to wage moderation has abated is that the UK has also sustained lower labour taxation.
Despite Opposition accusations of 'tax and spend' policies, economists have praise for how much of the UK workforce has accepted lower gross wages for the same net income. In the private sector, that has meant higher profitability and growth but in the public domain it has underpinned the government's £21.5bn annual efficiency agenda.
More controversially perhaps, the IMF also praises the way in which union buy-in and declining labour taxation rates have been accompanied by welfare reforms that have frozen or slashed income for recipients.
Hutton will have noted the conclusion that stricter eligibility criteria, such as those he is attaching to future IB claims, have still allowed Denmark, for example, to pay generous benefit levels without compromising growth or employment levels.
Indicating future changes to the UK system, a Department for Work and Pensions spokesman said: 'What has worked for the past ten years will not necessarily work for the next decade, so we must continue to learn from other states… like Denmark.'
Brown's refusal to implement hefty labour protection through regulation (as in France and Germany) means that the UK is better prepared for a globalised economy, the study claims.
However, the IMF's assessment is not all good news for Brown. It repeats earlier concerns over the UK's public sector debt levels (close to the cap of 40% of national income under Brown's fiscal rules) and expenditure.
The IMF notes that Brown initially oversaw the 'most aggressive fiscal expansion of any G7 country' to fund New Labour's public sector spending spree. And it warns that 'tight spending control will be needed to halt the rise in public debt'.
Brown is, of course, aware of this, and has warned departments to expect Scrooge-like settlements in this year's Comprehensive Spending Review. But it is notable that the IMF has reissued its warning, in spite of Brown's purse-tightening in March's Budget.
The chancellor faces a further dilemma, according to experts in Washington. He must consider tax and spend policies just when he has promised income tax cuts from 2008.
The IMF also warns that the world's most dynamic economies are ill-prepared for the impact of rising longevity. It warns: 'Without any fiscal adjustment, the expected increases in age-related spending imply explosive debt dynamics in all seven [G7] countries.'
The future gap in the UK's finances, fuelled by rising health care and pension costs, could be 4.8% of GDP: around £58bn at today's prices. And any financial imbalances will be more difficult the longer a decision is put off.
A Treasury spokesman was reassuring. 'Demographic change is comprehensively taken into account in the [department's] long-term projections,' he said.
But shadow health spokesman Andrew Lansley warned: 'Unless we start to increase productivity, improve technology and seriously provide first-class preventative care, then [IMF predictions] of trouble ahead will be all too real.'
And so begin the political rows over Brown's next big economic challenge.
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