Gordon Brown’s poisoned chalice

Last week’s pre-budget report was “vintage” Gordon Brown, as a Capital Economics note pointed out: a “blizzard of statistics and a flurry of measures, most of them old” – and few substantive changes. Take the extra cash for schools the chancellor trumpeted last week: £36bn is to be devoted to state schools over the next four years in order to lift spending on buildings and equipment to private-sector levels. Yet much of the money had already been promised; following the report, spending per pupil will rise by just £20 a head.

And there was no talk of reforms providing more parental choice and improving teaching, says Andrew Haldenby, director of the think tank Reform, in The Sunday Times. Yet the notion that standards will rise if you pump in extra money “has been tested to destruction”. Then there was yet more “moronic meddling”, says Antonia Senior in The Times. The
rules on Isas remain unnecessarily complicated, while Brown has clamped down on alternatively secured pensions, just six months after introducing them.

UK budget deficit: from surplus to shortfalls

But the key feature of the report was a further deterioration in the public finances. Despite a relatively robust economy over the past few years, the budget balance has swung from solid surpluses six years ago into the red, and the deficits have been continually revised upwards. This year, although growth has exceeded forecasts, the Government will have to borrow £37bn to plug the budget deficit, up by £1bn from the amount foreseen in the budget in March.

And £2bn in annual tax increases (half of which will be supplied by higher air-passenger duties) announced last week notwithstanding, borrowing for the next five years will total £145bn, rather than the £138bn forecast in March. The main problem is not a shortfall in tax revenue, but spending overshooting forecasts, says Bill Jamieson in Scotland on Sunday. So much for those “supposedly firm spending plans” for this year in the Comprehensive Spending Review of two years ago, when Brown gave
the impression of having “those spending departments by the throat”. As Hamish McRae puts it in The Independent on Sunday, “when you are increasing public spending very fast, you find it hard to control what you are doing”.

UK budget deficit: prepare for public sector showdown

“Big problems now lie ahead,” warns Jamieson. Brown intends to slow public spending growth, which is running at 7.1% so far this year, and has averaged 4.8% a year over the past six years, to 2.7% in 2007-2008 and 2% after that. If this isn’t achieved, the fiscal deficit will keep overshooting, or taxes will keep climbing. “Here lies Brown’s successor’s poisoned chalice.”

Forcing through pay restraint in the public sector to keep a lid on public spending won’t be easy: public-sector unions are already gearing up for a showdown with the chancellor, says Heather Stewart in The Observer.
Nor is his impending premiership going to be much fun. With virtually no room to manoeuvre on the public finances, his government will spend the next few years tackling “the same tired old problems” – poor skills, decrepit infrastructure, poor productivity – just with less cash.

MoneyWeek magazine

Latest issue:

Magazine cover
Party's over for Putin

The only portfolio safe from Russia's rout

The UK's best-selling financial magazine. Take a FREE trial today.
Claim 4 FREE Issues

Hedge fund manager Hugh Hendry: 'It felt like the sun rose only to humiliate me'

In a series of three short videos, Merryn Somerset-Webb talks to Hugh Hendry, manager of the Eclectica hedge fund, about everything from China to the US, Europe, and Japan.


Which investment platform?

When it comes to buying shares and funds, there are several investment platforms and brokers to choose from. They all offer various fee structures to suit individual investing habits.
Find out which one is best for you.


19 December 1932: BBC World Service begins

The first royal Christmas message by George V gave the fledgling World Service an early boost six days after it was founded in 1932.