Since becoming Chancellor in 1997 Gordon Brown has presided over the longest period of economic expansion in the UK since records began. He is widely credited for having been a model of fiscal prudence which has allowed the UK to go from the laughing stock of Europe to one of the best performers in the OECD.

Is Gordon Brown Britain’s best chancellor ever? Or is it more a case of being lucky to inherit a promising economic situation? Or is it as some people suggest an opportunity wasted, storing up economic problems for the future?

This is a short economic evaluation of Gordon Browns’ record as Chancellor.

Achievements of Gordon Brown as Chancellor of Exchequer.

1. Independence of Bank of England.

4 days into his job he handed over control of Monetary policy from no.11 to the Bank of England Monetary Policy Committee. This is widely regarded as being a key factor in creating economic stability and a low inflationary environment for the long period of economic expansion. (Note the Conservatives had made moves towards independence, making the step easier to make)

2. Longest Period of Economic Expansion on record.

Economic Growth has averaged 2.8% between 1997 – 2006 also the growth has been remarkably stable, the boom and bust cycles which characterised the 80s and early 90s have been completely avoided. The success of high growth and low inflation has earned generous praise from the IMF and World Bank. The chief economist of OECD, Jean-Philippe Cotis, described Britain as a "goldilocks" economy – This means they had the perfect balance of strong growth and low inflation. "It is in fact surprising how stable the UK economy has been. It is doing very well." (i)

3. Unemployment has fallen to the lowest level since the early 1970s.

In May 1997 the number unemployed was 1.7 million, this has now fallen to 925,000. (However it is worth noting the ILO measure, which doesn’t rely on govt statistics shows a higher figure.)

4. Fiscal Prudence.

On coming to power Gordon Brown imposed a rule of fiscal prudence saying government borrowing should never exceed more than 3% of GDP over the course of the economic cycle. This justified some tough public spending decisions in the early years. However in recent times he has been close to breaking his own fiscal rule due to more extravagant spending on health and education.

5. Avoided potentially difficult economic situations.

Although certain global factors have helped the UK economic performance Gordon Brown would point to potentially destabilizing influences which could have made things worse. For example; the dot com Boom and bust; the housing boom which threatened inflation; and the mild recession in Europe our main trading partner. None of these knocked the economy of target.

6. Inflation on Target.

Inflation has remained within the government’s target of CPI 2% +/-1. This is a remarkable record considering the recent inflation history of the UK. True much of the credit can be given to other sources. But unlike the previous Conservative governments, Gordon Brown never allowed himself to get carried away into thinking there had been an economic miracle. The Conservatives belief the economy could grow at 4%+ in the 1980s caused the boom and bust of the 1991.

7. Avoided Joining the EURO as the Eurozone went into recession.

His 5 economic tests were designed to prevent premature entry. There seems little interest in reviving such as idea. The UK has not been burdened with an interest rate unsuitable for the UK economy.


See also:

• Criticisms of Gordon Brown's Economic Record as Chancellor

References


i) Gordon Brown's Record

Labels: Economic News, Gordon Brown, UK economy

Gordon Brown has been Chancelor since 1997, despite impressive growth figures some argue he was lucky to inherit a strong economic foundation and actually the last 10 years represented a wasted opportunity to secure the long term future of the UK economy

1. He inherited the benefits of Supply side reforms.

It is argued by the Conservatives that when he took power the economic fundamentals were already in place for a strong economy. Unemployment was already sharply falling from 3 million to 1.6 million. Over the past 20 years policies such as Privatisation and labour market reforms had helped increase the UK’s competitiveness and placed the framework for low inflationary growth. Gordon Brown was merely lucky to inherit these.

2. A Tax Meddler.

Gordon Brown has introduced over 66 new types of tax. Although he has kept his promise of not raising income tax he has compensated by introducing new types of taxes like Airport tax, such taxes have been labelled “stealth taxes”. Depsite tax rises the government is close to breaking its own public sector borrowing rules. Despite 12 years of economic growth government borrowing stands at £38bn or 3% of GDP.

3. Public Sector spending has been inefficient.

Gordon Brown has increased spending on public services like health and education however these have failed to deliver good results in terms of improved services. It has been argued that much of this spending has been on “non jobs” e.g. extra layers of management in health care. A report by Centre for Policy Studies argues that productivity in the public sector has fallen by 1.3% in 2003 + 2004. However Private sector productivity has increased. (Source 1) Thus the tax raises have been inefficiently spent and will result in lost growth in the future.

4. Complicated tax and Benefit system.

Making tax credits means tested has meant that most recipients are unaware of their eligibility. For example a significant proportion of child tax credit goes uncollected.

5. Unbalanced Growth.

The strong economic growth masks the unbalanced nature of the growth. The main contributor towards economic growth has been consumers spending. The increase in consumer spending has been financed by rising house prices and record levels of borrowing. The unbalanced nature of the UK’s growth is reflected in the record current account deficit of 2.9% of GDP (3)

6. Housing Bubble could bust.

With much of the economies strength being based on rising house prices, if a housing boom was to turn into a bust it could have a disastrous effect on the economy. It is worth noting the US housing market is experiencing problems of high levels of mortgage defaults and falling prices. This could also happen in the UK.

7. Unreformed Pensions.

The UK faces a demographic time bomb with the % of retired workers due to rise in the next 20 years. Industry experts have criticised his pension reforms as being too timid.

• See also: Success of Gordon Brown during his time as Chancellor

References


(1) Brown Blows it - Money Week

(2) Brown's Record

(3) Balance of Payments statistics

(4) Economic Problems of EU

Labels: Economic News, Gordon Brown, UK economy

Is the US economy set for further growth or is a recession an inevitability for an economy that has been living beyond its means for a long time?

With Alan Greenspan suggesting the US economy has a 33% chance of entering into recession it is worth considering whether this is a realistic prospect or just a controversial parting shot from the 81 year old former Chair of the Federal Reserve. Alan Greenspan is held in high regard as an economist, some even credit him with “saving the US economy”. However his track record on economic predictions is mixed. He did predict a dotcom bubble bursting, (although it was 4 years before it occurred)

Reasons why the American Economy may enter a Recession.

1. Falling House Prices. After several years of a booming housing market. House prices are now starting to fall in most US states. Falling house prices will have a significant impact on consumer spending. As house prices fall, people can no longer remortgage to have extra capital to spend. Also falling house prices have a significant impact on consumer confidence. As housing is the biggest form of wealth it will adversely impact on the financial situation of most households. [1] America's past growth has been maintained by strong consumer spending, if this falters economic growth is likely to do the same.
   

2. House Prices could have further to fall. Looking at historic house price to earnings ratios the average US house price has been overvalued for several years. For the house price to earnings ratios to return to normal, house prices may have to fall by more than 18%. [2] Note the Japanese housing market provides a recent precedent for those who don’t believe house prices can fall for a long time.

3. Mortgage Lenders going Bust. Due to a record levels of default on sub prime mortgages, the number of mortgage lenders going out of business is at an all time high. [3] This has also changed other financial markets attitude to risk. Banks and stock markets will be much less willing to lend on dubious terms. The net effect is that investment and consumer spending will grow much slower, or even start to fall.

4. Current Account Deficit. The US current account deficit is currently 6.5% of GDP. [4] For a long time some economists have said there is nothing to worry about. The deficit has been financed by Chinese investors willing to buy US assets, even with a relatively low interest rate. However increasingly Chinese and Asian investors are seeking to diversify out of the US dollar. The dollar is losing its “safe haven” status. Partly because of events in Iraq and Afghanistan but also because of a realisation that the US economy is not as dominant as it used to be in the past. If the Chinese start buying less US securities it will cause a further devaluation in the dollar and also require higher interest rates to attract people to buy sufficient US securities. The higher interest rates will exacerbate any fall in US consumer demand.

5. Budget Deficit. The US has a twin deficit. As well as a balance of payments deficit. They also have a budget deficit. The effect of this is that it puts upward pressure on interest rates. Higher interest rates are required to attract investors to buy bonds and securites. Having such a large deficit also leaves the government less room for manoeuvre in terms of expansionary fiscal policy. If the US economy does start to slow down there is little scope for further tax cuts and increases in government spending.

6. High levels of debt. High levels of debt make the US economy susceptible to increases in interest rates. Higher interest rates may be necessary because of the twin deficits and falling dollar. Even a small rise in interest rates could have a significant adverse effect on heavily indebted consumers.
   
   
7. Falling Stock Market. By itself a falling stock market doesn't cause a recession, but it is indicative of the change in confidence and mood of the US economic situation that US share prices have fallen sharply since last week.
   

Reasons why the US economy may not enter recession.

1. High Economic Growth. Economic growth is still positive and inflation is under control. Current economic statistics are generally good, despite growth being revised downward. The Fed still expects growth of 2.75% - 3% next year

2. The Global economy is no longer dependent on US consumers. Economic growth in Asia and particularly China means that there is a growing Chinese middle class who will be increasingly willing to buy US exports in the future. It is possible the trade deficit could change over time. Especially as devaluation makes the US dollar more attractive.

[1] US house price sales fall 17%

[2] US house prices 18% overvalued

[3] US Mortgage lenders going bust

[4] US current account deficit

Other References

• Greenspan predicts US recession
  
• US economic data at Economist
• America’s Economy at Economist
  

Labels: Economic News, recession, US economy