Brown needs to get a grip on government borrowing

The press has turned on Browns economic stewardship with a vengeance. For ten years I have tried to point out that Brown did not make the Bank of England independent, and that he had weakened it in a way which made it likely a future financial crisis would be handled badly. I lost the battle beneath the weight of Browns spin and the readiness of so many to believe him. For ten years I have pointed out that Browns preference for higher tax income and higher spending was bound to create an inefficient public sector, and weaken the overall performance of the UK economy. Many commentators turned a blind eye to this, because inflation and interest rates were low compared to the 1970s and the ERM period.

Now the press can find little good in Browns economic stewardship, seeing that the UK has suffered from higher interest rates, higher inflation and slower growth than the successful Anglosphere economies, and seeing that the UK economy is now unbalanced, with huge public sector and balance of payments deficits.

Browns period in charge of the UK economy as Chancellor and now as PM divides into three periods. In the first, 1997-2000, he carried on with Conservative spending plans, he repaid public debt, and continued the impressive recovery that started soon after we exited the ERM under the Conservatives. He was married to Prudence, and all went well.

In the second period, 2000-2006, Brown went on a huge spending spree, hurling money at the NHS, at education and many other areas of government. He and his colleagues just wanted to boast about record levels of spending. They did not seem to pause to ask what they were buying with all the money. They bloated the budgets for external advice and consultancy, they pushed up public sector pay more rapidly than private sector pay, set up many new quangoes, and recruited large numbers of extra people into the civil service. They did recruit some more nurses, teachers and doctors, just as previous governments did. They did rebuild some schools and hospitals that needed modernising, but there was overall too little to show for the vast increase in spending. Public sector efficiency fell in some areas, and performed very badly overall. Public debt started to build up, and Brown encouraged his own sub prime financing for government, creating a large number of off balance sheet ways of swelling public borrowing.

In the third period we are witnessing efforts to bring public spending growth under control. This is a very necessary task. Stupid mistakes like the meanness over the police pay settlement show a lack of political touch and a lack of understanding of the significant numbers. Worrying about ?40 million for the police is bizarre, at a time when ?25,000 million for Northern Rock threatens to upend any attempts at spending control. The UK economy will not start to perform as well as the more successful economies in the world until public spending is under proper control, and the public deficit is falling rapidly.

The UK is now paying the price of its own government excess in recent years. Too much public borrowing crowds out private sector activity. Browns lower tax rates on enterprise through his reform of capital gains tax and his movement down of the rates of income tax and corporation tax, were more than offset by huge tax rises elsewhere through the pensions tax, the congestion charge, national insurance and others. As a result the UK is now much less tax competitive than it was in 1997, and faces the threat of a worsening of parts of the capital gains tax regime.

It is most important that the UK government does get on top of its own spending and borrowing rapidly, to help stabilise a shaky economy. It is also important that the government stops digging an ever large hole on Northern Rock. I cannot believe the huge sums they are risking and committing to this venture, with still no sign that they are putting in basic banking disciplines to ensure we get our money back any time soon. These failures mean continued pressure on peoples spending power, a lower pound, and a falling growth rate.

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  • About John Redwood


    John Redwood won a free place at Kent College, Canterbury, and graduated from Magdalen College Oxford. He is a Distinguished fellow of All Souls, Oxford. A businessman by background, he has set up an investment management business, was both executive and non executive chairman of a quoted industrial PLC, and chaired a manufacturing company with factories in Birmingham, Chicago, India and China. He is the MP for Wokingham, first elected in 1987.

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