Why we can’t afford a third term

Allister Heath shows how Gordon Brown has played fast and loose with the facts to portray Britain as a dynamic economy. The truth is that the Chancellor is a tax-and-spender who has laid up huge problems for the future The reputation of Gordon Brown has never stood higher than it does this election weekend. The Chancellor has pulled off a double which has eluded virtually every chancellor in history: he is hailed simultaneously as a political genius and as an outstanding manager of the British economy.

Politically, this reputation is well enough justified. The general election has granted Gordon Brown the prize he has sought for almost two decades. He is now the universally accepted Labour leader-in-waiting. Tony Blair has publicly pledged his endorsement, but only because he had no choice. The Chancellor is a far more powerful and trusted figure than the Prime Minister, both inside the Labour party and in the country at large. Gordon Brown has become the crutch of a widely despised Prime Minister.

Economically, it looks at first sight the same story. At the start of the election campaign Tony Blair hailed his Chancellor as the finest for 100 years. In a speech on Monday, the Chancellor audaciously laid claim to be the inheritor of Margaret Thatcher’s legacy of prudent economic housekeeping.

It may seem churlish to take issue with the great claims made by and for Gordon Brown. But it seems likely that in due course Brown will be marked down not as one of the greatest but instead as one of the most destructive chancellors in British history. His achievements over the past eight years have been greatly exaggerated, and the future looks full of menace. Gordon Brown is characteristically New Labour: he has brilliantly constructed his own reputation by playing fast and loose with the facts while gradually draining the British economy of its dynamism with a flood of red tape and tax hikes.

The Treasury sometimes seems to have modelled itself on the Ministry of Truth in Orwell’s Nineteen Eighty-Four: the past has been erased, history rewritten to ensure that 1997 has become the year zero and the Tory years portrayed as a dark age of recession, inflation, unemployment and poverty. With the copious use of selective, always misleading and sometimes downright erroneous figures, Brown’s successes have been greatly exaggerated while his failures have been camouflaged in the statistical fog.

When Brown was given the keys to No. 11 Downing Street, he was bequeathed two crucial reforms. The first was the supply-side, microeconomic revolution of the 1980s, when the economy was privatised, reformed and deregulated; the second was the macroeconomic changes of the post-Exchange Rate Mechanism (ERM) era, which laid the foundations for the current low inflation and low interest rates that were subsequently entrenched by Brown’s sensible decision to grant the Bank of England its independence. That is why, when he became Chancellor, Brown was told by Treasury officials that the economic figures were ‘fantastically good’ and ‘much better than predicted’.

Since then, under Brown, economic and productivity growth have slowed, the trade deficit has exploded, the decline of manufacturing accelerated, the fiscal situation has started to deteriorate again, international competitiveness has fallen, savings have collapsed and Britain is facing a long-term pensions crisis. Most of what is good with the British economy today is due to the Tory reforms of the 1980s and 1990s; almost all the economic problems the country will face by the end of the decade will have been caused by Brown’s mismanagement.

In their election literature across the country, Labour candidates have parroted Brown’s claims that interest rates have halved under the current government, with the implicit threat that they would double under the Tories. The truth is that interest rates are now barely a quarter lower than when the Tories were last in office. Thanks to the new era of stability ushered in after Britain’s departure from the ERM in 1992, interest rates had fall en to 6.25 per cent in the spring of 1997; today they are at 4.75 per cent and going up.

Inflation and interest rates would have continued to fall under any government after 1997, as they have in every other rich country; today the biggest threat to low rates is Brown’s public-spending spree and public sector recruitment binge, forcing the Bank of England to put up rates to keep the economy in check.

Brown’s related claim that ‘interest rates are at their lowest level for 35 years’ is equally wrong: as anybody who has a mortgage knows only too well, interest rates have been hiked five times in recent months; banks and building societies have followed suit. Rates did indeed hit a record low but that was more than two years ago; the City is forecasting that rates will soon be put up to 5 per cent, perhaps as early as 9 May.

The Chancellor’s claims that inflation is at its ‘lowest level for 30 years’ is even more breathtakingly wrong. Inflation on the retail price index measure was 2.6 per cent in the second quarter of 1997, having been tamed by Kenneth Clarke; today it is 3.2 per cent. The consumer price index is back up to a seven-year high. Then there are Gordon Brown’s claims about economic growth. He points out that Britain has grown for 51 consecutive quarters, which he claims is the longest period of sustained growth since records began in the year 1701. This is highly misleading stuff.

It is true that the economy has now grown for 51 consecutive quarters, but the first 19 and a half of these took place when first Norman Lamont and then Kenneth Clarke were chancellors; Brown was Chancellor for only 31 and a half of these quarters. In fact, the economy actually grew faster during the Tory period, when the compound rate of growth was 0.77 per cent a quarter, against 0.69 per cent during Brown’s period — despite constant and controversial adjustments over the past two years to the way the economy is measured which have helped Brown’s record. When looked at in annual terms, the British economy grew for 26 consecutive years between 1947 and 1973 — with a faster average growth rate, despite a few negative quarters.

Apart from the huge increase in public spending, much of it debt-financed, there are other, equally unhealthy reasons why the economy appears to have done well. The British stopped saving and went on a spending spree: the savings ratio has collapsed from 9.7 per cent of income in the spring of 1997 to 5.6 per cent last year. Together with Brown’s raid on private pensions when he abolished their tax advantage, this ensures that Britain is on course for a long-term pensions and savings crisis. So far, the government has refused to say how it will tackle this; we await the results of the Adair Turner commission into pensions after the election. The issue will become explosive in a third Labour term.

Because Brown’s economic growth predictions at his 2004 Budget turned out to be right, he is now basking in a wholly undeserved reputation for being an unrivalled forecaster. All Brown’s carefully cultivated Fleet Street supporters, especially the Daily Mail and the Sun, have bought this hook, line and sinker: it is a pity that none of their commentators can be bothered to trawl through past Budgets, for they would discover that Brown has been taking them all for a ride. In fact, the Chancellor grossly and repeatedly overpredicted growth for 2001, 2002 and 2003, eventually being forced into humiliating downgrades which he characteristically managed to present as triumphs. For this year, few in the City expect his 3 per cent to 3.5 per cent forecast to be right: they think that a maximum of 2.7 per cent is more likely.

Brown has also consistently underestimated how much money he could squeeze out of the economy. His long-term borrowing forecast made in his Budget in 2001 will turn out to be wrong by a mind-boggling £100 billion or so; he has overestimated tax receipts every year since the collapse of the dotcom bubble. The budget deficit was £34.5 billion last year, far too high in a year when the economy grew strongly; the shortfall is likely to remain almost as high this year. The true extent of the deficit and national debt would be even larger but for Brown’s campaign to push huge amounts of public spending off-balance sheet, relying on the private finance initiative to pay for many capital projects such as new hospitals or roads. The debt of the railway has also been classified as part of the private sector, even though it ought by rights to appear on Brown’s books. The liabilities of pensions for public sector workers have also exploded and will eventually have to be met by the taxpayer. As a result, taxes will have to go up again to meet Brown’s self-imposed fiscal rules. The Institute for Fiscal Studies expects rises of £11 billion in a third Labour term; the Ernst & Young Item Club is pencilling in £10 billion.

But the taxpayer is already being made to sweat. It is not only the better-off who are facing extremely steep rates of tax, with the top rate up to 41 per cent; because tax credits are means-tested, hundreds of thousands of average families face losing 60–70 per cent of any extra income if they get a rise, robbing them of any incentive to improve their lives.

Stealth taxes have been the name of the game. There has been a 4.7 million jump in the number of people liable for income tax since 1997 — taking the total to 30.5 million. Top-rate taxpayers have surged from 2.1 million under the Tories to 3.4 million today and an extra 600,000 people are likely to be caught in the top-rate net in a third Labour term. There have been similar surges in the number of people liable for inheritance tax and stamp duty, as tax thresholds have not kept up with earnings and house prices. Council tax has also surged (and will rise further after the coming property revaluation); the combined effect was a small drop in average take-home pay last year.

More and more people are being dragged into the welfare state, with couples earning up to £58,000 a year eligible for tax credits as long as they fill in a 12-page form and read 55 pages of notes on how to apply. A massive 69 per cent of households are now in receipt of at least one state benefit; 22 per cent of the population is on income-related benefits and 15 per cent on tax credits. Remarkably, 30 per cent of the population derive more than half their income from state support, while up to a quarter of workers are employed by the government.

Under a third Labour term, the British economy, once the most dynamic in Europe, will continue to become progressively Europeanised. So far, according to the government’s own figures, which underplay the extent of the problem, the cumulative cost of new red tape since 1998 has reached £39 billion. Taxes are on course to reach a 25-year high as a share of national income. The Organisation for Economic Co-operation and Development (OECD) expects total government spending in Britain to reach a massive 45 per cent of national income this year. The speed and scale of this transformation from market economy to social democracy can be seen from the fact that in 2000 public spending was only 37.5 per cent of national income. The most fundamental shift of the Brown years has been to move Britain to European levels of public spending and away from the lower tax models of English-speaking countries such as the US, Australia, Ireland and New Zealand.

Already, parts of the country have become largely socialised: in Wales and the north-east of England public spending makes up 59 per cent of the local economy; in Scotland it is 52 per cent. By contrast, in London and the southeast, which pay the most tax, it is only a third: these regions are being bled dry to pay for hand-outs to the rest of the country, while slowly being dragged down to the level of lowgrowth, low-employment Scotland. Despite Brown’s constant boasts about how he is helping enterprise and promoting flexibility for business, the UK has tumbled on all the main international competitiveness league tables; this decline will intensify over the coming years.

At the start of this year, the Prime Minister and his allies made a failed attempt to persuade Gordon Brown to accept the Foreign Office after 6 May: soon the Chancellor may come bitterly to regret his failure to get out while the going was good.

Allister Heath is economics editor of the Business.