Soft landing for Gordon?, by Peter Riddell

16 Mar 06
Next week's Budget looks like being a return to form for the chancellor, thanks to a big rise in tax receipts. But is he on course to hit his political as well as economic targets? Peter Riddell reports on a PM in waiting

17 March 2006

Next week's Budget looks like being a return to form for the chancellor, thanks to a big rise in tax receipts. But is he on course to hit his political as well as economic targets? Peter Riddell reports on a PM in waiting

Gordon Brown also has a day job, though you could easily have forgotten this. The main media focus recently has been on Project Gordon: his preparations for taking over as prime minister. Almost all his recent public activities have been outside his Treasury brief. We have had speeches on national security, the armed forces, constitutional reform and young people, with more promised in the coming months on education, the environment and many other topics.

But Brown's future is, as he well knows, about much more than wearing a trendy pink silk tie, rather than a drab red one, putting on a Biggles-like helicopter pilot's helmet and meeting Shakira, the pop singer and Unicef ambassador. What matters, as will be apparent from the Budget on March 22, is still what Brown does at the Treasury. His record there will determine not only his reputation as the longest serving chancellor for 200 years but also, crucially, what he will be able to do when he finally takes over at Number 10.

In one sense, there is nothing new about Brown spreading his wings. He has never been content with just managing the economy. Having shed one of the chancellor's traditional responsibilities when he handed over monetary and interest rate policy to the Bank of England, he has turned the Treasury both into a major spending department in its own right, via the tax credits system, and into a social policy department. Its remit has run across the range of welfare, employment and industrial policy, with international development thrown in for good measure.

In his Pre-Budget Reports and Budget statements, Brown has often pre-empted announcements by other secretaries of state. As one remarked to me, only half jokingly: 'At least Gordon told me a few days before what new schemes he was announcing for my department.'

But now Brown has moved into what have traditionally been Tony Blair's areas, including national and international security. He has wanted to show that he is 'sound' on fighting terrorism and supporting the armed forces, being as hawkish on the detention of suspected terrorists as Blair, if not more so. This is to show that he has the spread, as well as the authority, to become prime minister.

Central to all these speeches and interviews has been his emphasis on the need for more reform. This is partly to counter rumblings from ultra-Blairites that he has been anti-reform, a charge that understandably infuriates him. He repeatedly emphasises that the improvement drive needs to be intensified. Hence, the current Education Bill is only a first step and there needs to be more change to introduce personalised learning, especially for teenagers.

A Brown premiership will obviously differ from that of the past nine years. But the change might be more in style than in substance. After all, Brown has been the architect of many, if not most, of the government's industrial and social policies. There might be differences, such as on the scope of the choice and diversity programme in health. But there will be more continuity than change.

The crucial political test will be about his style as prime minister: whether he can move away from his centralised approach to decision-taking and operating via an almost tribal network of loyal allies. He has worked with a close coterie of advisers and officials in the Treasury. Can he develop as prime minister?

The Brown camp is nervous about Tory leader David Cameron, and a battle between the familiar, and possibly over-familiar, and the new and the fresh. Cameron and shadow chancellor George Osborne have deliberately targeted Brown. They hardly mention Tony Blair any longer in their speeches. He is treated as history. Instead, they focus on Brown, whom they depict as too old, out of touch and only a very recent convert to interest in the environment and young people.

The Tories are also trying to undermine the chancellor's economic reputation by highlighting problems over the outlook for public finances, Britain's middling productivity record and the threat to our competitive position from increased taxes and regulations.

Osborne has made his attack personal in claiming that Brown has not only been personally unpleasant to him but also to other Labour ministers.

But Brown is a supreme political strategist, always thinking about how Labour, and he, should position themselves to best advantage. The focus on issues such as the environment and young people is intended to counter Cameron's attempt to shift the Tories on to new ground, as well as to show that Labour has not run out of steam. Brown also often returns to his familiar line of attack that the Tories would slash public spending, or investment, as he calls it.

Yet none of Brown's ambitions are attainable unless the economy remains strong. There will be no money for expanding the fight against terrorism, for all the schemes for community service for young people and the many other ideas he has put forward recently.

His image as Prudence, the Iron Chancellor, under whom Britain has enjoyed a record period of economic expansion and strong public finances, has recently come under fire. No one disputes that the British performance has been – in the words of the International Monetary Fund – 'remarkable', with economic expansion for more than 13 years (starting, of course, well before Labour came to power), with low inflation and rising employment.

However, growth slackened last year and public borrowing has risen, stretching the Treasury's fiscal rules to near breaking point. Brown did not do his reputation much good last year when he announced a 'reinterpretation' of the terms of his 'golden rule' about borrowing, which conveniently gave him several billion pounds more room for manoeuvre.

Brown has relished his Houdini-like performances at each Pre-Budget Report and Budget. Despite a worsening fiscal position, he has regularly defied forecasts that he will break his fiscal rules. He looks to be in luck again this time.

Back in December, in the Pre-Budget Report, he revised up his estimate of the budget deficit for this financial year by around £5bn to £10.6bn. But the latest monthly figures on public finance from the Treasury show a big jump in central government receipts, thanks to high corporation tax payments, boosted by the change in timing of the collection of North Sea tax receipts, announced in the March 2005 Budget.

So the Institute for Fiscal Studies has been suggesting that the current deficit could come in £500m less than the PBR forecast. Brown has lost no time in pointing to these trends. Expect some gloating on March 22.

But don't expect any great revelations then, either about the Comprehensive Spending Review or the long-term fiscal outlook. That is for next year. Moreover, this year will not be like the March 2002 Budget, which both initiated the big acceleration in the overall rate of growth of public spending and announced the rise in employer and employee national insurance contributions to pay for the jump in the NHS Budget.

The most we are likely to hear on March 22 are reports on the Gershon efficiency reviews and stern warnings about the toughness of the coming CSR. Brown's emphasis is likely to be on long-term challenges to the British economy, particularly from India and China.

This promises a further instalment of the familiar array of initiatives and reviews by distinguished advisers aimed at solving problems as diverse as housing, skills shortages and training, scientific research and innovation and particularly productivity, where Britain's record remains disappointing by international standards. There might be Brown stability, but there is no Brown economic miracle.

However, looking further ahead, he faces acute medium-term dilemmas over public spending and taxation. Just look at any independent survey of the British economy – whether from the IFS in its Green Budget, the Organisation for Economic Co-operation and Development or, most recently, the IMF – and the message is the same: current spending plans are not sustainable.

Some of the pessimists believe that even if the rate of growth of spending is reduced from 2008 onwards, Brown will still break his fiscal rules – on prudent borrowing and overall levels of national debt. This will require an increase in taxes.

The Treasury has disputed this analysis. The differences turn on rival estimates for potential economic growth and tax receipts. The Treasury believes there is more spare capacity, and hence room for non-inflationary expansion, than most outside forecasters, including the Bank of England. It expects both a solid recovery this year and next and also a faster rate of increase in tax receipts.

However, even if these differences are put to one side, the message for the public sector is hardly comforting. These estimates assume a marked deceleration in spending growth. After the exceptional rises of 5%–6% per cent a year in real terms from 2003 to 2005, the rate of growth has already slowed to 4% this year and is projected to be 3% a year in the 2006 to 2008 period. Last December's Pre-Budget Report included 'illustrative' projections of spending growth of no more than 2% a year in real terms after 2008.

Brown has been careful to describe these as 'working assumptions', rather than final figures. But this would be the slowest rate of growth since 1999. Of course, a faster growth in spending would increase the need for higher taxes.

But the trend is clear, and, as the IMF dryly warned, 'the envisaged expenditure restraint will require careful planning' and 'extremely difficult choices'.

The big shadow over the Budget will be this review. The current furore over the rise in the total deficits of NHS trusts – and the associated departure of Sir Nigel Crisp as both permanent secretary at the Department of Health and NHS chief executive – is a pointer to the problems ahead. Operations are being cancelled, wards closed and staff laid off. These difficulties are occurring when total health spending is rising strongly. So what will happen when overall spending is increasing much more slowly? Remember also, the continuing impact of big revenue commitments under the Private Finance Initiative programme, as well as big pay rises for some staff and rising pension liabilities.

These are not just matters for Brown and the Treasury over the next year. The spending decisions that he announces, possibly in his last major decision as chancellor, will cover the period up to the next general election and beyond. There is nothing more important to departments than the level and growth of their spending programmes. Brown's success in managing the economy to ensure sustained growth, and the spending decisions that he will mastermind, will set the framework for what ministers will be able to do for the rest of this Parliament.

As chancellor he will be determining his own freedom of manoeuvre as prime minister.

Peter Riddell is chief political commentator of The Times and author of The unfulfilled prime minister — Tony Blair's quest for a legacy

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