The Brown Legacy

March 21 is Gordon Brown's 11th and, presumably, final appearance at the Budget Despatch Box as Chancellor. It will be his chance to set out a policy agenda for his successor but it would be wrong to see it merely as a 'hand-over' speech.

December 2006's Pre Budget Report showed us a Chancellor who appeared to have run out of enthusiasm and ideas - somebody whose mind wasn't entirely on the job. This is likely to be the case.

Gordon Brown's thoughts must increasingly be taken up with what he plans to do when he moves next door. Budget 2007 may well give us more of the same. He is likely to feel that the bright ideas, the big surprises on policy can wait until he can write the initials "PM" next to his name rather than just the initials "MP".

At least the date of Budget 2007 was an olive branch to the City. A week later than has been usual, for the first time in years the Budget does not clash with the Cheltenham Festival. The more cynical doyens of the Square Mile might refer to the old City saw, "Bad numbers take longer to add up than good ones."

Indeed, it would appear that Gordon Brown is losing his 'iron chancellor' reputation for economic confidence. A Daily Telegraph-YouGov poll (a source admittedly not unbiased) suggested on February 23 that the Conservative party was seen as more likely than Labour to run the economy well - a potentially significant turnaround in public opinion.

When voters were asked which party was likely to run the economy well, 30% said the Conservatives and 27% Labour. At the 2005 election, Labour had a commanding 22-point lead, with 49% regarding them as economically competent compared to 27% for the Tories.

But what of the Brown legacy? It would be interesting to know now what the history books will say in years hence of the man who has become the longest serving Chancellor of the Exchequer since the 1820s. No doubt the key decision was to make the Bank of England's control of interest rate policy explicitly independent.

When the Conservatives lost the 1997 election, they were still trying to eliminate a large budget deficit from the early 1990s. Kenneth Clarke had roughly halved the budget deficit he inherited as Chancellor in 1993 by the time Gordon Brown took over at the Treasury.

Chancellor Brown then further improved the government's finances through Labour's first term but in the second went on a spending spree just as tax revenues dropped. However, assuming his tenure at Number 11 does end this year, he will leave the public finances stronger than he found them, although most industrial countries have recorded bigger improvements over the same period.

The Institute for Fiscal Studies (IFS) says net tax increases announced by Mr Brown since 1997 will bring in more than £17 billion in 2007-08. Adding Conservative policy changes that Mr Brown maintained, his decision not to adjust tax allowances for above-inflation earnings growth and economic developments since 1997, there is forecast to be a total rise in tax revenue since 1996-97 equivalent to £40 billion, or £1,300 per family.

For the past five years the Chancellor has had to keep explaining why he was borrowing more than he had expected. Last year, he even shifted his calculation of the timing of the economic cycle for the second time - a move widely derided at the time as straightforward massaging of the facts to make sure he stayed within his "golden rule" not to borrow for current spending over the cycle.

The IFS comments, "If history is any guide, at some point the Treasury's fortunes as a fiscal forecaster will take a turn for the better. But whoever is Chancellor should be wary of spending any unexpected revenue that materialises or giving it away in tax cuts. As in the current cycle, this would risk the need for retrenchment later."

This is, of course, a perennial problem for Chancellors. If you run a fiscal surplus, it is hard to resist the many "well-reasoned" requests for more spending or tax cuts.

Politically, a surplus is harder to justify than a deficit. But if Chancellors fail to build up surpluses in the good years, however, they simply store up financial problems for the bad years: interest rates have to be higher and growth lower than they need be if state finances were balanced.

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