After 11 consecutive years of being Chancellor of the Exchequer Gordon Brown is the longest serving chancellor since 1820 overtaking David Lloyd George (2). As Gordon Brown wrly noted as chancellor Lloyd George successfully combined both being chancellor and being PM. In fact his last budget speech sounded in parts like a pre – election budget. – If not a general election at least a leadership election.

Quick Summary of the 2007 Budget

1. Income tax cut from 22p to 20p. This is largely financed by abolishing the 10p starting rate and removing allowances in N.I contributions. – “The tax man giveth and the tax man taketh away.”
2. Corporation tax cut from 30% to 28%. This will largely be financed by raising the tax rate on small business from 20% to 22%. The justification was that it was to avoid people using small companies as a way to reduce income tax burden. However it is strange to increase corporation tax to 22% when income tax falls to 20%. Tax relief on capital investment was also reduced from 25% to 20% this will particularly cost manufacturing firms.
3. Environmental taxes. Road tax on gas guzzlers will double. Tax on petrol will rise above the rate of inflation in the future. This will have quite a limited impact. Evidence suggests raising road tax does little to reduce the demand for SUVs which cost in the range of £20,000 - £30,000. Overall on the environment Gordon Brown can be accused of just tinkering at the edges. It will do little to make the target of cutting CO2 emissions by 70% a reality.
4. Increase in Child Benefit. The reduction in tax credits means many on low incomes have an effective marginal tax rate of 70% (with income tax, NI and reduction of benefits and tax credits)
5. Increase in Pension credits, but the means tested nature of this benefit discourages savings in the long term. E.g. when a single person pension passes £6,100 they have a 40% deduction in tax credit.
6. Economic Record. The economic performance of the UK continues to remain impressive with economic growth edging upto 3% and inflation still on target for 2%. However an interesting question is how much credit will the voters give to Gordon Brown? Polls suggest the Conservatives are ahead in both economic management and perspectives on the environment

To summarise the overall impact of the budget one could use this choice expression of David Smith, economist at the Times.

“This chancellor is like one of those people you shake hands with only to discover a couple of days later you are missing a couple of fingers.” (1)

Labels: Gordon Brown, UK Budget, UK economy

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

As Gordon Brown approaches his last budget as chancellor many are reviewing his tenure as Chancellor and evaluating his success or failure. One important contribution he made was to steer the UK away from joining the Euro on the ground that "it would not be in Britain's economic interest". The justification for this was based on his 5 economics tests.

Before deciding whether the UK should join the Euro the Chancellor, Gordon Brown drew up 5 economic tests which the UK must pass for the UK to join. The main principle behind these 5 economic tests was whether the UK would cope with a common monetary policy. The 5 tests are in some ways superfluous. The main test being is really whether the UK has a degree of economic harmonisation with the rest of Europe.

5 Economic Tests for Joining the Euro

1. Economic Harmonisation.
   
   The UK economy must be harmonised with the Euro zone. If the UK economy was growing much faster than EU then UK interest rates would need to be higher. For example, at the moment if the UK joined interest rates would fall and this may cause inflation. Therefore it is essential that the UK has a similar economic cycle to Europe. Even if there is temporary harmonisation there is no guarantee it will continue on a permanent basis.
   
   
2. Is there sufficient Flexibility?
   
   If the UK went into recession could it be able to cope? It would have no influence over Monetary policy but also Fiscal policy is limited by the growth and stability pact. This limits the amount of government borrowing and therefore limits the scope for expansionary fiscal policy.
   
   
3. Effect on Investment.
   
   Would joining the euro create better conditions for firms making long-term decisions to invest in Britain? UK inward Investment has not suffered since the UK decided not to join
   
   
4. Effect on Financial services.
   
   What impact would entry into the euro have on the UK's financial services industry? London as a financial centre has boomed in recent years.
   
   
5. Effect on Growth and Jobs
   
   Would joining the euro promote higher growth, stability and a lasting increase in jobs? There is no clear evidence that it would. UK economy has done better outside the Euro than in the Euro.

At the moment the weight of economic opinion is that the UK is better off not joining the Euro. One important factor is that the UK housing market is very sensitive to interest rates. Many UK householders are homeowners and also many mortgages are variable. Therefore the cost of mortgages fluctuates with changes in the base rate. Thus a small change in European interest rates could potentially have a damaging effect on UK economy. For example, if the UK was to join now, interest rates would fall causing a potentially harmful inflationary boom.

See also:

• Why the UK will never join the Euro.
• Benefits of Joining Euro
• Costs of Joining Euro

Labels: Euro, Gordon Brown, UK economy