25 MARCH 2006, Page 10

An unpickable knot in Brown’s tortured being

Martin Vander Weyer says that this Budget did not resolve the fundamental conflicts in the Chancellor’s approach to business Ihave never met a red-blooded businessperson who is completely convinced of Gordon Brown’s conversion to the cause of ‘enterprise’ though I don’t think I can speak authoritatively for Sarah Macaulay, the successful public relations entrepreneur who once gave me a lift to a Spectator party but subsequently became the Chancellor’s wife.

The point about Brown is not that he was lying through his gleaming new teeth when he spoke, in Wednesday’s Budget speech, of his pride in ‘the dynamism and breadth of Britain’s growing entrepreneurial culture’. The point is that the body language that accompanies everything he says about business and markets reveals a deep-seated discomfort, an unpickable knot in his tortured being. His intellect told him years ago — on one of his summer outings to Cape Cod, perhaps — that entrepreneurs and private investors are a great creative force for prosperity; but his Presbyterian soul continues to whisper in his other ear that they are also irresponsible, peeragebuying tax-dodgers, who will misuse their resources time after time unless directed by him towards the greater social good. In ten Budgets in a row he has vented this inner dilemma, first praising his own manifold initiatives in favour of enterprise, then revealing — often in measures whose impact only becomes apparent in the small print, long after the triumphal speech itself — fundamental distaste for the whole capitalist circus. Most of all, being the man he is, he hates the free market because he cannot control it.

So it was that among a particularly lavish pre-Budget finger-buffet of news stories this week, we learnt that the Chancellor is to convene an elite group of international business leaders, including Bill Gates of Microsoft and Sir Terry Leahy of Tesco, to advise him on how to make Britain more competitive; that he is demanding a radical transformation of UK Trade and Investment, the agency responsible for marketing Britain abroad; and that he is joining forces with the London Stock Exchange and other institutions ‘to develop a strategy to sustain London’s competitiveness as a global financial centre’. And yet at the same time, he confirmed an inflationbusting increase in the minimum wage from £5.05 to £5.35, having originally been set at £3.60 — blatantly contradicting his declared urge to keep the British economy flexible to meet the threats of globalisation.

In the Budget itself, he talked about ‘leading the world in new industries and technologies’ and threw £100 million at ‘small firms with high growth potential’. But he gave no response to the CBI’s call for a £5 billion cut in business taxes, and no response to the clamour from every corner of the private sector for relief from the stupendous burden of red tape he has imposed. Instead, he tinkered with the research and development tax credits which have proved too complex for many businesses to access, and talked about after-school science clubs and business school scholarships to address Britain’s yawning skills gap. It all sounds sensible until you remember that he has been on this mission already for nine years. He would doubtless be provoked to sulphurous rage by the suggestion that he would be wiser at this stage simply to abolish a swath of his own previous measures. But the fact is that the accumulation of all his efforts to promote enterprise and business investment since the first euphoric phase of his Chancellorship has produced negligible and in some cases negative — results.

He produced, for example, some impressive-sounding statistics about the number of enterprises in Britain, including very small ones and the self-employed. But what is not so impressive is the trend in the number of businesses registered for VAT which offers a snapshot of the rate at which small traders climb a ladder to pass the turnover threshold for VAT registration (currently £60,000) or slide down a snake below it. The Thatcher boom, for example, saw a steeply rising five-year graph of the number of registered businesses, but the increase was wiped out again in the recession. From 1997 to 2000 — amid dotcom euphoria — there was a return to growth. But over the following four years, despite everything Brown claimed to be doing to encourage this seed-corn layer of the economy, the total number actually shrank. Last year it rose again by a modest 1.2 per cent — though the increase may have had much to do with vigorous enforcement measures by HM Revenue and Customs which provoked complaints from the Federation of Small Businesses, and many of the new businesses were in the overheated property and contruction sectors.

Brown’s defenders say that these are not accurate indicators, because among the things he regularly tinkers with are VAT registration rules; but one thing you can say for sure is that they do not support a picture of a blossoming small business sector. Neither should we be encouraged, incidentally — since I praised the Prince’s Trust in these pages a couple of weeks ago for its remarkable track record as a backer of start-up businesses — by the news that the Chancellor has just cancelled the government’s annual grant to the Trust in order to divert it into his own less successful start-up schemes.

More worrying still are the figures for business investment overall, a measure of how much the private sector is willing to commit to the global battle for competitiveness and technological advantage. Again, Brown had some big numbers to throw around in his speech, but he was careful to avoid expressing them in proportion to the economy as a whole. In fact, business investment has fallen from a peak of more than 14 per cent of gross domestic product at the end of the 1980s, and 12.5 per cent in the late 1990s boom, to a record low of only 9 per cent. Underlying this drop are two specific Brownian interventions. First, his tax grab on pension funds (as Sir Martin Jacomb eloquently explained last week) has forced large companies to allocate profits to fill holes in their pension schemes and offer share buy-backs to institutional shareholders, rather than to invest in business expansion. Secondly, and most significantly, enormous and wasteful increases in public sector spending have had the effect of ‘squeezing out’ private sector investment.

The perverse effects of this are to be seen in chronic weaknesses of productivity and huge gulfs in performance at the regional level. The prosperous business communities of the south and east of England never needed Brown’s helping hand. But the north and the Celtic fringes could have benefited hugely from a resurgence of the private sector, whether in the form of small, craft-based enterprises or giant, foreign-owned factories. What they have had instead is an explosion of state and local government spending: through my North Yorkshire letter box this week came a council tax demand for double the amount I paid in 1997, accompanied by an invitation to contribute to a ‘Corporate Assessment self assessment’ exercise to help the county council examine how well it works ‘in partnership, to deliver improved outcomes across the board for our communities’. The result of this job-filling, paperchasing extravaganza across the whole of mainland Britain north of Watford Gap is, according to an analysis by the Financial Times, that public sector growth has been racing away at 4 per cent, more than twice the feeble rate of private sector growth; in the north east, the differential is more than three times. Likewise, public sector wage inflation has been running at well over 4 per cent — though Brown claims he will halve it this year — and when he boasted of a net 170,000 increase in jobs in the past year, he failed to point out that 131,000 are in the public sector. In my part of the world, you can see the results in every large town and city: industrial wastelands and tatty discount shops alongside palatial new offices for quangos and benefits agencies.

But if Brown has completely failed to turn regional poverty into prosperity through private-sector mechanisms, not all entrepreneurs are ready to condemn: many have done reasonably well despite him. Brent Hoberman, the co-founder of lastminute.com, said on the Today programme on the morning of the Budget that he felt fortunate to have been able to build his business in Britain during the Brown era, because it would have been so much more difficult to do so in France or Germany, or under a more overtly socialist regime. But why, he went on, do business taxes have to be so high?

That, in the end, will be the verdict of the business community, not only on this Budget but on the whole Brown chancellorship. No one can say he has wrecked the economy; he and the independent Bank of England have indeed delivered, as he so proudly and repeatedly proclaims, an era of relative stability, low inflation and low interest rates. But if he had preached less, tinkered less and taxed less — and genuinely overcome his hostility to free markets — he could have delivered so much more.