Gordon Brown makes the guardians of two sets of received wisdom pretty uncomfortable. On the one hand what you might call the Livingstone tendency objects vigorously to his dour insistence on prudence and orthodox finance. On the other, the newest Labour fringe frets that he wants to tax them more in order to spend more on poor people, in a very old Labour way.
These contradictory concerns have given rise to the idea that the Chancellor of the Exchequer has been spending by stealth, that he might claim to have earmarked an extra £40 billion for health and education, but somehow it does not show up in the books. Which, then, is the true Gordon Brown – the new or the old? And which shall we see on Budget day next week?
The question is made all the harder to answer by the Treasury’s ever-impressive skill at concealing what is really happening to public expenditure in the mass of figures it publishes. By using three of the tables in November’s pre-Budget report and a calculator, it is possible to work out that next financial year will see a jump in the share of public spending in the economy from 39 to 40 per cent. The extra is mainly current spending rather than public sector investment, and most of it is that £40 billion on health and education.
The evidence of the Chancellor being a Scarlet Pimpernel for socialism is strengthened by the shape of his Budgets so far. The tax burden has increased significantly, a tendency inherited in large part from Kenneth Clarke, his Tory predecessor, who had started to repair the hole blasted in the public finances by his predecessor. (Norman Lamont must go down in history as one of the most incompetent chancellors ever.)
However, Brown has added his own tax rises. He has taken billions from the privatised utilities in the windfall levy. And, scarcely noticed, billions from the middle classes in the shape of adjustments to national insurance and the removal of privileges enjoyed by their pension funds.
The funds raised are being redirected to the long-term unemployed through the New Deal, to the working poor through the working families tax credit, and in other ways to those in our society most in need. The Institute for Fiscal Studies described last year’s Budget as the most redistributive in recent memory. Nobody who talks to the Chancellor can be in any doubt that there will be more of this next week.
Whatever the exact measures, whether it is the abolition of Miras to fund the 10p starting rate of income tax or the taxation of child benefit for top-rate taxpayers to finance after-school clubs, every Brown Budget will be a Budget for a fairer society.
This still leaves part of the question unanswered, though. Why does the Chancellor not therefore win plaudits from all those in his party who share the same moral vision? There are two possible reasons. One is his caution about the amount of extra tax-and-spend he is willing and able to adopt. The other is his equal passion about the need to get the economy working better, to boost potential growth. This requires an enthusiasm about entrepreneurship, competition, flexibility and similar characteristics tainted by Thatcherism.
Brown has legislated a limit to the amount the government can borrow – the amount by which its spending can exceed tax revenues. Over the course of an economic cycle the government can borrow only to invest, and must finance all current spending from taxes. Public sector debt must remain stable as a proportion of GDP.
Such fiscal orthodoxy makes him look out of step with resurgent social democracy on the Continent. It appears, all of a sudden, rather old-fashioned. But history is on the side of prudence. John Major doubled the national debt and saw interest payments rise to become the third biggest item of government spending.
Labour came to power in May 1997 well aware of a vivid example of the pay-off in lower interest rates that a smaller government deficit could deliver. On his election victory in 1992, Bill Clinton had been advised by Alan Greenspan, chairman of the US Federal Reserve, to adopt exactly this policy. Clinton did so, in the teeth of opposition from his own administration, and is still enjoying the fruits of his decision. UK long-term interest rates fell dramatically in May 1997, partly because the Bank of England unexpectedly got the power to set short-term interest rates, but also because it became clear that the first Labour government since 1979 was going to run a tight budgetary policy. The cost of borrowing is at its lowest for a generation.
Those on the traditional left just do not believe this evidence. Nor do they believe that more public spending would not lead to more jobs and higher living standards. Nor do they believe that Keynesian demand management is ineffective against barriers such as low skills, low productivity, lack of competition and over-regulation. The Chancellor, on the other hand, evidently does believe that the structure of the economy creates barriers to growth. If his concern for fairness is one side of the Budget coin, his determination to improve Britain’s economic capacity is the other.
After all, it is trivially easy to boost the economy by raising public spending or cutting interest rates even further. What is difficult is judging when a bit more of a boost will trigger higher inflation and the damaging boom-and-bust cycle. Past Labour governments exercised scant caution. Although the global environment has changed utterly, with inflation a non- existent threat, it is still right to move by pushing back the barriers rather than running the economy headlong into them.
And that means doing controversial things such as encouraging people who start companies to make a serious amount of money and allowing businesses to operate in a flexible jobs market, as well as politically correct things like reskilling the unemployed and introducing a minimum wage.
Hiding behind Brown’s enthusiasm for wealth creation and sound finance are a preference for wealth redistribution and higher government spending on frontline services. But there is a catch. Health and education are what economists call, bizarrely, luxury goods. As people become better off, their desire for health and education services rises more than proportionately. The share of income spent on food, on the other hand, falls as income rises.
If the bulk of health and education expenditure is to stay in the public sector, government spending must rise as a share of the economy. If the relative size of the public sector is to stay roughly the same as it is now, more and more of our extra spending on these core areas will be in the private sector. The question might have to wait until the second term or even beyond that, but it is one no amount of stealth can avoid.
The writer is economics editor of the “Independent”
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