POLITICS
Gordon Brown could find that he has budgeted for a downturn
BRUCE ANDERSON
In one respect, it was a successful budget, for it enabled Gordon Brown's spin doctors to recover some of their lost reputations. The budget was broadly neutral for middle Britain; there was a danger, therefore, that it would have minimal political impact, with everyone saying, 'So what?' To counteract this, the spinners briefed the press that the middle classes were going to suffer. In the event, suffering was replaced by gratitude.
As regards the larger picture, 'so what' is still a justified response. Underneath the rhetoric about work and enterprise, it was an insubstantial budget, its large claims generally petering out into little measures. In his opening peroration, Mr Brown seemed to be asserting that he was about to remould the welfare state and to achieve something that has defeated all politicians of all parties for a generation: the abolition of the poverty trap. This trap is caused by a malign interaction of the tax system and welfare benefits. The danger is that for every additional pound a low-paid worker earns, he will lose almost as much in bene- fits. In effect, the low-paid are confronted by marginal tax rates similar to those which afflicted the rich during the 1970s. This deters many poor people from seeking work, except in the black economy.
But it is easier to describe the poverty trap than to avoid it. It would be very expensive to taper benefits in such a way as to remove the disincentive effect — or so it was thought, until Mr Brown came along, with his lavish claims. But there is a diffi- culty. The claims are not matched by the reality. As a result of Mr Brown's changes, the number of low-paid families facing the equivalent of a marginal tax rate of 60 per cent will increase, from just over 750,000 to just over one million. The problem of the poverty trap remains unsolved.
It is not clear whether the Chancellor's employment measures will be any more suc- cessful. Since he first announced them in opposition, Mr Brown has had to widen the scope of his 'welfare to work' proposals; there are no longer enough young unem- ployed to absorb the windfall tax funds. There is a lesson there. Jobs are best creat- ed, not by schemes or subsidies, but by eco- nomic growth in a deregulated labour mar- ket. There are signs that this is now being understood; the new government has bene- fited from on-the-job training by Martin Taylor of Barclay's Bank. These days, there is even less enthusiasm in ministerial circles for introducing a minimum wage than for banning fox-hunting. The government feels unable to dump the minimum wage com- mitment, but it will be implemented in a thoroughly cynical fashion, at as a low a level as possible. After all, ministers will say, who invented the Anglo-American labour market? The Americans, and they have had a minimum wage since Roosevelt.
There is something in that argument. Americans often insist that the minimum wage cannot do any harm, because it is set at the hourly rate which you'd have to pay a high-school kid to clear the snow off your drive, But Americans who argue like that rarely live in the inner cities, almost the only parts of America where there is still unemployment. While the abolition of the minimum wage would not solve those prob- lems — the cultural obstacles are far too great — it is a deterrent to employers. So it will be here, unless it is set at a derisory rate.
We, too, have cultural problems. But Mr Brown does not understand this, because he is an unfortunate combination: a Thatcherite and a vulgar Marxist. He resem- bles Lady Thatcher, in that work is at the heart of his personal gospel. But those who cannot imagine what life would be like with- out working have no insight into the mental universe of those who are work-averse. Their numbers have grown in Britain over the past generation, encouraged by a flaccid welfare state, and as Mr Brown will discov- er, many of the hard-core unemployed are not waiting eagerly for a job-seeker's allowance; they do not want a job, on any terms. There are signs that some ministers — especially Frank Field — have under- stood this problem and have realised that disincentives to unemployment are at least as important as incentives to employment.
Some of the Chancellor's capital gains tax reforms were welcome, but the ban on 'bed- and-breakfasting' was an irruption of social- ist primitivism. Bed-and-breakfasting is the procedure whereby a shareholder sells stock in order to enjoy his annual tax-exempt cap- ital gains allowance, but then repurchases the same shares almost immediately; stock- brokers are happy to arrange such transac- tions at minimal commission. So why does Mr Brown disapprove? Bed-and-breakfast- ing sounds like a loophole and is offensive alike to the prim instincts of the Treasury and the class-hating instincts of many Labour backbenchers. But there is nothing immoral about it; as long as there is a capi- tal gains allowance, individual investors ought to be allowed to decide how to use it.
The capital gains tax concessions which Mr Brown made to entrepreneurs were welcome. Tories are entitled to gnash their teeth when they contemplate the crop which they left for Mr Brown to harvest, but they ought also to be ashamed that it was left to a Labour chancellor to undo a few of the worst consequences of the increases in capital gains tax which Nigel Lawson introduced in 1988. A reduction in CGT to the standard rate of income tax, as opposed to the marginal rate, is long over- due — but that is too much to expect from a Labour chancellor, even in good times.
For this was a good times budget. Its rev- enue forecasts assume steady growth, falling unemployment and a healthy cash flow in the private sector. The latter could compen- sate for last year's raids on pension funds and changes to advance corporation tax which will mean that most firms will be pay- ing more money, at least for the next few years. But if those forecasts are wrong, Mr Brown's changes will have ensured that industry and commerce have a harder land- ing than they would otherwise have done. The tax take is already forecast to rise to almost 40 per cent of GDP in the course of this Parliament. If the revenue is buoyant, that gives Mr Brown scope for tax cuts as well as spending increases, but if there is a downturn, the consequences will be severe.
In one respect, Mr Brown has made it more likely that there will be a degree of downturn. By plundering the pension funds, he switched resources from long-term sav- ings to current expenditure. This did noth- ing to lessen the Bank of England's fears about inflation, and nor will the budget. So we are likely to have high interest rates and a strong pound for some time to come. Without encouraging British industry's self- pitying tendency to place all its hopes on a continually depreciating pound, it does seem unfortunate that sterling is now trad- ing comfortably above its ERM levels.
On Tuesday, Mr Brown boasted about helping Britain to meet the Maastricht cri- teria. That was hubristic of him. Over the next few months, he will have to cope with the difficulties of running a single currency in one country.
Previous page
