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Anything But Prudence 2 June 2006

Posted by David in Formal Works, Labour.

Gordon Brown cannot have a dictionary or know the meaning of prudence. “Prudent; adjective 1 wise or careful in conduct, 2 shrewd or thrifty in planning ahead, 3 wary; discreet”, or so reads the English Dictionary. Add this term with the name “Gordon Brown” is in itself a huge contradiction in terms. Yet how has the Chancellor made himself known as “Prudent Mr Brown”? The answer lies in just how prudent is Mr Brown?

Looking at his record, Gordon Brown could have either a split personality or mad twin brother, as there are very decidedly two faces of Brown. First, there’s the prudent, cautious, sensible if dull Mr Brown, who reigned up to about 1999/2000. Then there’s tax and spend Brown, the rule bending, deficit building, bureaucrat hiring and still dull Mr Brown, who took over 1999/2000 and have ruled the Treasury ever since. Either that, or he just may be the Jekyll and Hyde Chancellor.

Things started rosy before Brown had even stepped inside Number Eleven, when Blair took over the Labour leadership and the ‘New Labour’ era begun. The Conservatives had reversed their good economic reputation, and Labour was keen to harvest this and reverse their previously terrible one. As the economy recovered from the ERM and early-90s recession, Blair and Brown built a reputation as economically trustable. Publicly ditching tax rise plans and embracing the free market economy, speech after speech, policy launch after launch, bludgeoned a belief into the public that Labour was the economic saviour. Suddenly, the Labour shadow Chancellor was speaking at the CBI, meeting business leaders and telling the TUC off for being out-dated and wrong! They won over business, and the public too, into their ‘New Labour’ reputation. Even top business leaders endorsed Labour on a 1997 election broadcast. Labour publicly championed cheap mortgages with low interest rates, stability, growth, low inflation and private sector employment. The stage had been set for prudence.

And prudence was what Britain got, then at least. Key principle was the Golden Rule. Willingly portraying himself already as the prudent Scottish Presbyterian, Gordon Brown became trusted thanks to his public Golden Rule for public finances; that over the economic cycle, the Government will only borrow to invest. To the public, it was obvious, to Chancellors, and Labour, a Damascus moment. Sticking to the Golden Rule became vital, and it lasted fairly well.

Brown further cemented his economic reputation by one of the new government’s first acts, the granting of independence to the Bank of England. The government demanding they set interest rates “to maintain interest rates as low as possible whilst keeping inflation below 2%” and requiring “a written apology and explanation if the inflation level is breached”. Granting the BOE was a policy so Tory even the Tories opposed it, though later they backed it. The idea had been considered by Margaret Thatcher, but decided against as it would “remove a substantial block to Labour”. Now mortgage costs were the Governors fault, not the Governments, and Brown radiated prudence, self-control and sensibility.

Despite Blair’s open pro-European stance, Brown stood firm with his 5 economic tests which had to be met before joining the Euro. Once again, cautious, sensible, prudent. The tests themselves were another example of prudence and generally extended the Conservative “wait and see” policy. Prudence continues on a closer look that reveals some questions may never be satisfied, and allows the Treasury to simply rule out joining in a more Euro-friendly way. For instance, “Are business cycles and economic structures compatible so that we and others could live comfortably with euro interest rates on a permanent basis?” will probably never been satisfied as the euro interest rates aren’t even suitable for existing euro-zone nations. “If problems emerge is there sufficient flexibility to deal with them?” can be responded with a firm no, without flexibility of interest rates problems are worsened and lengthened, as slow growth in Germany and inflation in Ireland. “Would joining EMU create better conditions for firms making long-term decisions to invest in Britain?” is again no, as the flexibility the Pound offers yet still being inside the Common Market has caused much investment in Britain. “What impact would entry into EMU have on the competitive position of the UK's financial services industry, particularly the City's wholesale markets?” is more of a lengthy question, but many agree the Euro will damage flexibility and freedom to adapt to the global situation. Finally, “will joining EMU promote higher growth, stability and a lasting increase in jobs?” is once again no due to the flexibility problems already mentioned. On the Euro, Brown has been most prudent and sensible, although could now easily rule out joining quoting the Continent’s economic gloom.

Next came another major revelation of New Labour. For the first few years they stuck to Conservative spending plans, even making savings, and allowing the budget surplus to continue growing. This is a very prudent act, saving for a rainy day. Further, to the shock of many, cutting the standard rate of income tax by 1p. The prudent image was by now reinforced, cemented and firmly stuck in the public consciousness.

But, it was not to last. As the Millennium approaches, cue ominous music. A strong pound has hurt exports and the balance of payments went decidedly red. Fears were rife of a housing crash and in 2000 the stock market crashed badly. The first economic wobbles since Labour came to power were happening and threatening melt down before the impending election. It is around this time that prudent Brown becomes tax and spend Brown.

First of the Acts of Imprudence was to freeze the income tax bands. By refusing to raise income tax bands with inflation or wage inflation, more people moved into higher bands, paying more tax. This process, known as fiscal drag or tax creep, in effect works as a silent tax rise, as people move unknowingly into higher rates. Any tax rise is imprudent, removing the incentive to work, reducing investment and strangling the economy. After several years of this imprudent policy, tax is now rated as the highest stress factor among young people according to many surveys. More and more people are quitting work or working less, as tax bands make it not worth the hassle, thus eventually cutting tax receipts anyway.

Later, in 2005, the Treasury deliberately removed positive sections on a research paper about so called “flat rate income tax”, and has avoided the issue, which was described as revenue neutral within three years, and positive thereafter. It is most imprudent to use fiscal drag as a stealth tax increase and not to look into alternatives.

The Millennium downturn was delayed due to a number of factors. A weaker Pound lead a small export lead recovery, although recently this has deteriorated as the balance of payments worsens. Low interest rates continued to encourage property development, and the house market has been vital to continued economic growth. Most important however has been consumer spending, with a great deal of it on credit. Savings are at a very low rate, and UK personal debt is now over £1,000 billion. This High Street bonanza would normally have pushed up inflation, however this has been temporarily slowed due to cheap imports.

However, most imprudent has been the public sector driven recovery, financed through ludicrous levels of spending. Budgets for all departments have soared with little real improvement; the rapid growth being eaten up by managers, consultants and bureaucrats. In fact, bureaucratic employment has been vital to the later Brown’s economic mirage. Government figures show 650,000 new civil servants have been created for the main Central government alone since 1999. Local government, quangos and other quasi-government organisations have all been very busy recruiting. Public sector spending is now one-third of economic growth, and it cannot ever be sustained.

Brown inherited a budget surplus in 1997, which continued to grow. However, since 2000, he has pushed the government into the red. Any borrowing is imprudent, but the “shrewd in planning ahead” definition also comes into play here. For every year in office, at every budget, Gordon Brown has over-estimated growth and thus also over-estimated tax revenue. In 2004 he planned a £10bln budget deficit and got a £36bln one. For 2005 he now predicts a £36bln deficit, and will probably get an even worse one. Suddenly it looked as if the Golden Rule would be breached, and it would have been, if it wasn’t for one handy get out clause; except investment. He could borrow all he likes to “invest”, and has. But when he was still heading for humiliation, he decides to redefine investment. Suddenly, maintenance costs become investments, as do dozens of other costs, and voila, he saves himself thanks to fudging figures and creative accountancy. By 2005 however, even this was not enough, and Brown extended the economic cycle to suit his rule. Now, the cycle is measured by his rule, not the economy, and this imprudent act has left the next cycle far less to spend.

It is not only fiscal drag that has occurred under Labour. A variety of stealth taxes, surcharges and extra costs have been spread around. Some taxes now only collect marginally more than they cost to collect; a wasteful tax that harms the economy. Extra costs put onto councils by the Treasury have lead to council tax rises, and the proposed revaluation will see most bills rising sharply as they have in Wales.

Further imprudence has lead to greater benefit dependency, particularly tax credits, which discourage people working over 18-hours per week, or earning more money, as benefits stop. Other benefits too create a cycle of dependency.

The economy recently has been held up entirely by government spending and consumer credit, which obviously cannot last. Both have been inflationary, and this has been held off by cheap imports keeping costs steady. It has been imprudent of the Chancellor to prop the economy up with heavy spending and rising national and personal debts. The recent EU-China trade disagreement threatened inflation by stemming imports, and as quotas still exist this problem will return. In fact, some of next years quota has been brought forwards, leaving less for then. Mr Brown’s imprudent spending, and encouragement of personal spending beyond means, will be a serious problem in the future, both as debt, tax and inflation. Much debt is as mortgages, with high house prices, however a slump could cause widespread negative equity.

Today, we have at least a £36bln deficit. Certainly not prudent. Independent growth forecasts are half of what the Chancellor expects, and he will face a shortfall of £11bln just to keep within his discredited and devalued Golden Rule. This is equivalent to 3% on the basic rate of income tax. Certainly not prudent. Trade figures continue to worsen, inflation creeps upwards despite cheap imports, and consumer spending is struggling. The High Street is braced for a bad Christmas and bleak economic future. Though he will blame much on high oil prices, it is he who is to blame. In conclusion, there can be just one phrase; it was going so well, what went wrong? Brown was the master of prudence, now he is a wasteful and gambling with the future.



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