GORDON BROWN’S SPEECH: WHAT IT MEANS FOR INDUSTRY: There were no surprises in a steady-as-she-goes Budget but that doesn’t really help business, discovers Ian Fraser
The biggest laugh chancellor Gordon Brown elicited from a packed House of Commons during his budget speech last Wednesday came after he said he had decided against extending Value-Added Tax (VAT) to flip flops.
It was a dig at the proclivities of Conservative leader David Cameron in wearing this particular form of beachwear, as well as his habit of continually changing his policy position.
Brown’s Budget contained large doses of the customary hubris — he just cannot seem to resist patting himself on the back over his achievements as Chancellor — but he also managed to pull off the trick of making a broadly neutral (and therefore potentially boring) Budget actually sound quite exciting.
Rather than the usual budgetary fare, which has recently tended to include masses of mindboggling fiscal tinkering coupled with the odd downward revision to his own growth targets, Brown used the latter half of his Budget speech as a platform for something much more expansive.
So the second half of Gordon Brown’s 61-minute oration became a shop window for his future vision of Britain, understandable given that the Fifer, wearing a mauve tie rather than his customary red for the occasion, has his sights firmly set on succeeding Tony Blair as prime minister.
So after the usual bombast about stability and prudence came tantalising glimpses of Brownland, a place where there will be an abundance of riches to fund things like scientific research, school Olympic Games and subsidised fuel for pensioners and where your average comprehensive school has the same financial fire power as Eton College.
Gordon Brown was careful to ensure that, as he lines himself up as a credible successor to Blair, there are no personal flip flops involved. Most of the revisions to his own forecasts for UK short and long-term economic growth, as well as the government’s future total tax take, had come with his pre-Budget report last November.
And on certain key issues — such as the environment and the Climate Change Levy — Brown seemed more eager to score political points against the Tories than take measures to help business.
“He got away without having to reveal any nasty surprises, “ said Robert Chote, director of the Institute of Fiscal Studies. “The outlook he predicted for both the economy and the public finances was almost identical to that which he presented in November’s pre-Budget report.”
Royal Bank of Scotland chief economist Andrew McLaughlin said that, even though there were quite a few changes that might have an effect on the nation’s finances, their overall value was relatively low. He said: “Brown announced 45 decisions with an impact on the public finances but, taken together, they amount to a minor give-away of £380 million next year — barely 0.07 per cent of total receipts.
“Over the course of the coming three years the Chancellor announced a marginal fiscal tightening of £740m. This is in sharp contrast with his last two post-election Budgets which tightened £17.8 billion and £12.9bn respectively.
“The tough decisions were taken in December on both growth forecasts and public borrowing. His hope then was that this would place the economy and the government finances on a desirable glide-path towards the next election.”
The biggest single revenue booster will come from a further clampdown on tax avoidance schemes used by corporates and wealthy individuals.
Iain Duff, chief economist at the Scottish Council for Development & Industry, believes the fact this was a “steady-as-she-goes” budget may in fact help boost business confidence.
Duff said: “Gordon Brown is keeping things pretty much as they are, with his eyes firmly fixed on gaining the keys to his next door neighbour’s house. You could call it boring but Brown’s previous Budgets have been heavily criticised for too much tinkering. A steady-as-she-goes Budget is good for businesses as it means less uncertainty.”
Gordon Brown did receive much favourable coverage over his aspiration to boost educational spending. However, it must be remembered that, since education is a devolved matter, this is unlikely to have an effect on Scotland.
Indeed business organisations were last week urging the Scottish Executive to spend the £87m it will gain as a result of this measure through the Barnett Formula on getting certain key transport projects back on track. The SCDI’s Duff said: “I would like to see them keep the momentum going on transport spending.”
Certain key projects such as the Airdrie to Bathgate railway line have temporarily hit the buffers, and the money could be used to crank these back into gear.
Ron Hewitt, chief executive of the Edinburgh Chamber of Commerce, and Ian McMillan, director of the CBI in Scotland, were both underwhelmed by the lack of pro-business measures in the Budget.
Hewitt said: “What we haven’t seen, which is long overdue, is any real attempt to cut the costs of red tape or create more favourable tax regimes to incentivise business investment. It is well understood that countries that have taken this path have actually ended up with a bigger tax haul as they become more attractive to inward investment.
“We’re disappointed he has again passed up the opportunity to enable enterprise to flourish, despite once again saying it was a key priority.”
McMillan said: “Overall this was a dissappointing Budget. The Chancellor has taken a cumulative £50bn from business over the past nine years. As the size of the public sector increases, there is almost a perfect negative correlation in terms of reduction in private sector investment.”
Even so McMillan was thankful for small mercies. He welcomed the freezing of fuel duty “because we in Scotland are a peripheral economy” and Brown’s decision to freeze duty on Scotch whisky and other spirits.
But Angus McCrone, senior economist at the Centre for Economics & Business Research, warned there may be trouble ahead: “The Budget was long on crowd-pleasing initiatives — from £440m extra in direct payments to schools, to new money for free national bus travel for pensioners, and even a cut in VAT on condoms from 17.5 per cent to 5 per cent — but short on measures to safeguard the UK economy.”
Maybe this was why Gordon Brown also unveiled a plan to privatise some £50bn of state-owned assets — including most of the state-owned nuclear industry, the Tote, public spectrum airwaves and Ministry of Defence firing ranges.
Hewitt said: “Gordon Brown’s magic wand trick of projecting a £16bn surplus over the next six years didn’t mention the fact which later arose that he was planning to sell off £30bn of the family silver including government holdings in Westinghouse and British Energy.”
Russell Hills, head of tax with KPMG in Scotland, warned that the Chancellor has left himself little room for manoeuvre — which is probably why the additional spending pledges announced on Wednesday were in reality so muted. He said: “The public finances may be on track to meet the Golden Rule this cycle but, even if spending growth slows sharply as planned, there is little margin for error.”
Given Gordon Brown’s sums will only add up if the UK experiences strong economic growth in both 2007 and 2008 — at a time when many economists predict a global slowdown stemming from higher interest rates and slower US growth — there could yet be flip flops ahead.
This article on Gordon Brown’s 2006 Budget was published in the Sunday Herald on 26 March 2006