What did Gordon do for 10 years?

Public spending ended Labour's first term income lower than it started; at the same time government revenues rose thanks to ongoing increases in fuel and tobacco duties (put in place by the Conservatives and then accelerated and maintained by Gordon Brown until the November 1999 Pre Budget Report).

Budget measures such as the abolition of repayable dividend tax credits and above-average economic growth, combined with the Chancellor's decision not to raise income tax thresholds as quickly as incomes ( this 'fiscal drag' brings more income into higher rate taxation) also boosted government income.

All this was 'prudence for a purpose. The purpose became clear as Labour's second term unfolded. Public spending rose sharply, with health, education, and lower-income pensioners and families with children the main beneficiaries. The return to budget deficits began to push public sector net debt up again, reaching 35% of national income in 2004-05.

The mid-years of Labour's third term are set to see public spending grow more slowly as a share of national income than in the previous years of plenty, reflecting the more cautious plans laid down in the 2004 Spending Review for 2006-07 and 2007-08.

In fact, with the 2005 election out of the way, the Chancellor announced a succession of net tax increases in the 2005 Pre Budget Report, the 2006 Budget and the 2006 Pre-Budget Report. These measures will raise an extra £6 billion in 2007-08.

Gordon Brown began with substantial net tax-raising measures in his first two Budgets which were then more than offset by net tax cuts in the remaining five Budgets and Pre Budget Reports of Labour's first term (including the abandonment of the fuel and tobacco escalators in the November 1999 Pre Budget Report).

The tax measures in Labour's second term were dominated by the increase in National Insurance contributions in the post-election April 2002 Budget, with relatively small net revenue-raisers in the remaining Budgets and Pre Budget Reports contributing to a net tax increase from all measures announced in the second term worth £14.3 billion next year.

Among the top 30 countries in the Organisation for Economic Co-operation and Development (OECD), the UK's corporate tax rate has slipped from 10th lowest in 2000 to joint 18th in 2006. The Institute for Fiscal studies says, "Out of the 22 OECD countries for which we have comparable data on a wide range of indicators, 15 reduced their debt and 17 improved their structural budget balances by more than the UK between 1996 and 2006.

"Having inherited a smaller public sector net debt than the Conservatives in 1979, after 10 years Mr Brown now finds himself for the first time with a higher debt burden than the Conservatives had after the same number of years in office. In addition, having inherited a smaller structural budget deficit than the Conservatives, and having reached the same peak structural surplus in his third year in office, Mr Brown has also presided over a bigger deterioration than the Conservatives over the subsequent seven years."

The IFS concludes that Gordon Brown "now faces the prospect of his first general election as Prime Minister with the tax burden rising and public spending falling. The tightening is less draconian than that on which the Conservatives fought the 1997 election, and Mr Brown doubtless hopes that the electorate will smile more favourably upon his efforts now than it did on those of his predecessors then."

However, in immediate terms, the Chancellor is likely to go out on a relative 'high'. Since the Pre Budget Report in December, the economy has picked up speed and public finances have improved somewhat.

It looks like the Chancellor will meet his target although some less charitable souls think the accounts are being tweaked with contractors not being paid until the new tax year and the Revenue driving to get tax in early. However, a problem does remain - at this point in the economic cycle the government really shouldn't be borrowing 3% of GDP.

Gordon's replacement as Chancellor (Ed Balls?) will need to look to reform corporation tax to maintain the UK's competitive position. Tax simplification, in the wake of the arch tax complicator is likely to be an issue as well. Anybody sitting down in the chair kept warm by Gordon Brown for the last 10 years is also likely to have some hard choices to make about cutting spending and raising taxes yet further.

Bill Jamieson in The Scotsman wrote on 27 February, "…we have moved into Gordon Brown's Third Phase as Chancellor. The First Phase, or Green Period had public spending rising very slowly against a background of strong economic growth. This restraint was sold on the basis that it was building up the coffers for a spending splurge. Then came the Second Phase, or Red Period, during which public-spending growth was let rip. Now we are in the Third Phase, or Blue Funk Period, where spending growth has to drop steadily and consistently - and with no promise of a spending spree thereafter."

The Budget targets assume both steady economic growth and a big slowdown in year-on-year real public spending growth, from 4.9% in the years 2001-2 to 2005-6 to 2.9% in 2006-7, to about 2% year-on-year in the years 2008-9 to 2010-11. The numbers may look fine on paper but they appear politically unsustainable.

Top of Page