Why Gordon Brown can't afford to stop spending

In this year's Budget, Gordon Brown promised to cut back on public spending. But we're just two months into the new financial year, and the UK is heading even further into the red.

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Remember this year's Budget? Probably not it consisted of the usual tedious speech designed to distract attention from the usual mish-mash of stealth taxes and policy U-turns in the small print.

But you might remember that the general feeling among the press was that Gordon Brown was turning tough. After the spending splurge, now came the tightening of the belt.

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One headline writer went so far as to call it the "Return of the Iron Chancellor". We did wonder at the time exactly when Mr Brown could ever have been considered an Iron' Chancellor but we'll ignore that for now.

So we're now two months into the new financial year. Is the public sector starting to feel the pinch?

Of course not...

In the 2006 Budget in March, the Chancellor predicted that public borrowing would end this financial year at £36bn, compared to £39bn last year. But so far he's just moving deeper into the red.

Public sector net borrowing in April and May totalled £10.3bn, compared to £8.6bn over the same period last year. That was £1bn more than most forecasters had expected, and the highest May figure on record.

Jonathan Lloynes at Capital Economics said: "We still think further significant tax increases will ultimately be required to put the public finances back on a sustainable footing."

Of course, the Chancellor's constant goal-post fiddling means "there is no immediate pressure" to act. He now has until the end of 2008 to make the books balance so that he meets his highly flexible 'golden' rule.

And he has no desire to act yet. If Mr Brown wants to have any chance of replacing Tony Blair, he has to make sure that his undeserved reputation as a safe pair of hands remains intact. If he believes he can grab the top spot before 2008, he may see no need to actually rein in borrowing, even if that's the impression he tries to give.

It would suit Mr Brown far better if he could move into the Prime Minister's chair and then leave his hapless successor to handle the mess he has left behind. Just as Federal Reserve chairman Alan Greenspan kept monetary policy nice and loose until Ben Bernanke took his place, so Mr Brown would rather keep the public sector cash flowing until he is well out of harm's way.

The trouble is that if Mr Brown does rein in public sector spending, it's going to hurt.

Unemployment in this country has been rising for nearly 18 months now, but the number of employed people is also going up. But that situation would deteriorate rapidly if the public sector was forced into a recruitment freeze.

Anthony Hilton in London's Evening Standard last week highlighted a very interesting statistic from the most recent batch of employment data. The total number of workforce jobs in the UK rose by 146,000 in the year to March. But public sector employment rose by 149,000 over the same period.

Now maths may not be the UK's strong point, but it doesn't take a genius to realise that this means that the private sector actually shed 3,000 posts last year.

So if Mr Brown wants to keep the housing market afloat which, after all, is the main reason that the typical voter still believes that the Chancellor has been doing an acceptable job of running the economy there's no way that he can start hacking back public sector employment. It's the only sector actually keeping people in work.

As for raising taxes - increasing the tax take in a transparent manner has never been Mr Brown's style. And his U-turn on inheritance tax on trusts shows that the financial press is finally getting wise to his stealth tax methods.

So you'd think Mr Brown would be looking to make savings wherever he can.

And yet it seems that plans to buy two "Blair Force One" aeroplanes are to go ahead, at least according to the BBC. Back in November, The Times reported that plans to buy the planes, for use by the Queen and ministers on official trips, had been vetoed by the Chancellor.

So why has Mr Brown relented? It seems that the planes "will not be bought outright, but taken on a long lease and are unlikely to come into service until late 2007 at the earliest."

As the Beeb cannily points out, more than a few people believe "Mr Blair may have stepped down" by that time.

So 'Blair Force One' could well be a misnomer. But whatever nickname the new ministerial fleet receives, you can be sure of one thing - if Gordon Brown's at the helm, there's no way it'll be a budget airline.

Turning to the stock markets...

The FTSE 100 clawed back some ground on Tuesday, rising 32 points to close at 5,658. Miners were on the comeback trail, with Anglo American the main riser, up 5% to £20.87. Fund manager Amvescap was one of the main losers, down 2% to 476p on fears that recent market turmoil will hit annual profits. For a full market report, see: London market close

Over in continental Europe, the Paris Cac 40 gained 41 points to 4,770, while the German Dax rose 54 to close at 5,493.

Across the Atlantic, US stocks were mixed. News that housebuilders started work on more properties than expected in May helped sentiment in early trading, but fears about more interest rate rises took over in later trade. The Dow Jones Industrial Average rose 32 to 10,974, but the S&P 500 was flat at 1,240 while the tech-heavy Nasdaq fell 3 to 2,107.

The unease on Wall Street continued to hang over Asian markets. The Nikkei 225 fell 4 points to 14,644, though it was well off the session lows. Exporters such as Sony and Toyota were yet again among the main losers on worries about the health of the US consumer.

This morning, oil was edging higher in New York, trading at around $69.45 a barrel. But Brent crude was lower, trading at around $66.50.

Meanwhile, spot gold was higher, trading at around $576.10 an ounce. Concerns over North Korea's possible missile launch drove some safe haven buying. Silver edged up too, rising to $10.30 an ounce.

And in the UK later today, the City will be eyeing minutes from the Bank of England's latest interest-rate setting meeting closely. The Bank voted for a rate freeze earlier this month, but it's uncertain which way individual members cast their votes after May's three-way split.

And our two recommended articles for today...

Why Jim Rogers thinks you should invest in commodities

- Most investors and advisers still regard commodities as "risky", but revolutionary new research has proved that commodities' status as the black sheep of the marketplace is undeserved, says investment legend Jim Rogers. To find out why understanding commodities can make you a better investor altogether, click here: Why Jim Rogers thinks you should invest in commodities

How the credit crunch will hit property markets

- Personal bankruptcies are at record levels in the UK - and many of those have gone bankrupt simply by spending too much, say Andrew Selsby and John Robson of RH Asset Management. But things are set to get much worse as lending criteria are tightened by both lenders and central banks. Find out what this will do to housing markets on both sides of the Atlantic, by clicking here: How the credit crunch will hit property markets

John Stepek

John is the executive editor of MoneyWeek and writes our daily investment email, Money Morning. John graduated from Strathclyde University with a degree in psychology in 1996 and has always been fascinated by the gap between the way the market works in theory and the way it works in practice, and by how our deep-rooted instincts work against our best interests as investors.

He started out in journalism by writing articles about the specific business challenges facing family firms. In 2003, he took a job on the finance desk of Teletext, where he spent two years covering the markets and breaking financial news. John joined MoneyWeek in 2005.

His work has been published in Families in Business, Shares magazine, Spear's Magazine, The Sunday Times, and The Spectator among others. He has also appeared as an expert commentator on BBC Radio 4's Today programme, BBC Radio Scotland, Newsnight, Daily Politics and Bloomberg. His first book, on contrarian investing, The Sceptical Investor, was released in March 2019. You can follow John on Twitter at @john_stepek.