Debate rages over Brown’s “creative accounting”

By Ian Fraser

Sunday Herald

March 25th, 2007

Gordon Brown may have designed his final Budget to ease his passage
into Number 10, but the jury is still out on whether he pulled it off

AS he seeks to spruce up his image so he can move next door as prime minister, Gordon Brown wanted to use his 11th Budget as chancellor to conjure up the “feelgood factor”.

As he advanced to the dispatch box in the House of Commons last Wednesday afternoon, the 55-year-old Fifer may have thought that the skilful positioning of a number of “giveaways” – each tailored to please specific constituencies including the unions, business, the green lobby, backbench Labour MPs etc – would be enough to propel him into Number 10, and keep him there after the next general election.

Gordon Brown delivers BudgetDressing up a fiscally neutral Budget as though it were one of the most transformational budgets of modern times was always going to be a tough call for Brown. Initially, it seemed like he might pull this off. The bombastic hubris had been toned down for the occasion, he looked less ashen-faced than usual, and he even managed to crack a joke about his new nickname, Uncle Joe, after criticism of his “Stalinist” attitude.

The cut in income tax was sufficient to garner some much needed positive headlines as Brown seeks to claw back some of the ground that has been lost to Tory leader David Cameron in the opinion polls. Next morning, The Sun was unequivocal. It splashed with the headline: “Budget sensation: Reasons 2p cheerful.”

But the think tanks, the commentariat and the more serious media were much more sceptical about whether Brown’s complex fiscal tinkering was going to make much of a difference for individuals or business. Once the fiscal “anoraks” and the resurgent Tories had pored over the small print of the Red Book and numerous appendices to the Budget, the consensus view soon shifted. Now it seemed that instead of being a master of munificence, Brown was in fact robbing Peter to pay Paul (for example, robbing manufacturers to benefit service companies).

The Tories’ jibe that this was little more than a “tax con” – since Brown had largely made up for the £8 billion loss of revenue brought about by the headline change to income tax by scrapping the lower 10p rate – was beginning to stick. As Liberal Democrat leader Sir Menzies Campbell successfully pointed out in the Commons, this meant Brown was effectively hitting the UK’s poorest earners in order to offer a fiscal bribe to Middle England.

If he is to achieve his goal of winning a fourth general election for Labour, Brown has two principal constituencies to please – his own backbenchers (who must still vote him in as leader) and the voters (who must vote for him in a general election some time in the next three years). Brown therefore sought to be as even handed as possible.

The backbenchers were thrown some tasty morsels such as the higher road tax for “Chelsea tractors”, financial assistance for pensioners (he was especially generous to those who lost their pensions when their former employers went bust, with the injection of further funds into the Financial Assistance Scheme) and significant boosts to expenditure on “front-line” public services of health and education.

And to the voters, he offered a range of incentives including help for working families through boosts to the child and working tax credits, and what was clearly intended to be his “tour de force” – the 2p cut in the basic rate of income tax. Brown said this will fall from 22 per cent to 20 per cent from April 2008. The move, announced just before he sat down, trumped last week’s Tory pledge of a 3p cut in income tax.

The measures introduced for businesses are perhaps less cosmetic than those for individuals. Despite his socialist roots, Brown has finally recognised that the City of London and the financial services sector, which is so critical to Scotland’s economy as well, is a notable success story. Business also welcomed Brown’s vision that “Britain must champion open markets, flexibility and free trade” and of “an open and inclusive globalisation, not protectionism”.

THE headline-grabbing cut in corporation tax – from 30 per cent to 28 per cent – matched as it was with the concomitant adjustments to capital allowances for plant and machinery, and the hike in taxation on unoccupied buildings – followed Brown’s recognition that potentially “mobile” companies (i.e. services-based and financial services businesses that are not tied down by tangible assets such as factories etc) must be given stronger reasons to remain in the UK.

The cut may have been precipitated by subtle threats from two of the UK’s biggest banks – HSBC and Barclays – that they might leave the UK unless corporate tax is reduced to levels seen in other countries such as Sweden (28 per cent) and Eire (12.5 per cent). In recent Budgets Brown has, stealthily or otherwise, been raising taxes on business, while competitor nations have been reducing theirs, and this has sparked a sharp fall in foreign direct investment in the UK. Many firms considering setting up shop in the UK are said to have been deterred by the sheer weight and complexity of our tax system.

Amanda Harvie, chief executive of Scottish Financial Enterprise, urged the chancellor to bring in the tax cut earlier.

She said: “We urge the speedy introduction [of the 2p cut in corporation tax] ahead of April 2008, which seems a long time frame compared with the rate at which some rival countries are moving to win more financial services business.” But again it was a game, as one headline writer put it, of what Gord giveth, Gord taketh away. Just as he offered a strong positive signal to larger services companies, Brown signalled the introduction of tax changes that could be extremely harmful to the critical small business sector, an area he has previously sought to champion.

“The chancellor has made the equivalent of a dawn raid on small companies over the last two Budgets,” said Patricia Ritchie, consultant tax director at lawyers Maclay Murray & Spens. “You have to wonder what the he has against small companies, particularly in the manufacturing sector.”

Sometimes, however, the whole Budget seemed like an elaborate charade designed mainly to spike the guns of his political opponents.

In Scotland, for example, the decision to trim corporation tax was almost certainly partly intended to undermine a key plank of the Scottish National Party’s economic policy. For years, Jim Mather, the SNP’s finance spokesman, and others in his party have argued that a lower rate of corporate tax could transform Scotland into a magnet for international businesses. Professor David Bell, head of economics at Stirling University, said: “The cut in corporate tax will squeeze the SNP’s latitude to argue that it could cut corporation tax and increase the number of businesses coming to Scotland.”

BUT what is the legacy of Brown’s 10-year reign over the Treasury?

Economists are unanimous that his biggest achievement was handing the Bank of England its independence soon after New Labour gained power in May 1997. Removing responsibility for setting interest rates from the politicians has, more than anything else, made it possible for Britain’s economy to enjoy the longest period of growth since the second world war, despite major upsets such as the 1998 Asian crisis and the dotcom crash of 2000.

Growth has averaged 2.8 per cent a year, without the dangerous undulations that characterised the Tory years. Inflation, too, has been steady and stable, averaging 2.4 per cent. Even though Scots complain that growth levels have been marginally lower here, Brown’s cherished “stability” has created an economic backdrop against which the majority of businesses and individuals have had the opportunity to prosper.

Lucy O’Carroll head of treasury at HBOS, said: “The [economic] numbers are undoubtedly impressive. Activity expanded by 2.75 per cent last year to cap the longest unbroken run of growth in the past 200 years. Employment is at record levels. Inflation has crept up this year, but falling energy bills should bring it back to target later this year.”

And Martin Wolff, writing in the Financial Times, said: “The stable growth over the past decade has been remarkable. It is not just that the economy is now growing faster than those of the other members of the G7 countries but that it has kept on growing faster than most of them over a lengthy period. Now, as Brown reminded his audience, the UK is the second richest country in the G7. He has every reason to consider this a job well done.”

Brown is also respected by many economists for resisting pressure from the likes of Tony Blair to join the euro. His five economic tests ensured the UK did not join a currency that could have left us at the mercy of inappropriate interest rates set by the ECB in Frankfurt.

However, there are also some big blots on this utopian landscape. For example, economists argue that Brown’s plans to tighten public spending, despite his inability to control the budget, will make it near impossible for his successor in Number 11 to balance the books. And that is going to become even harder if the current US economic slowdown ends up hurting economic growth on this side of the Atlantic (as might be expected). This would mean that the UK economy would fail to achieve Brown’s bullish forecast for economic growth of 2.75 per cent to 3.25 per cent in 2007.

Ron Hewitt, chief executive of Edinburgh Chamber of Commerce, said: “The chancellor’s record overall is one of increasing taxation (faster than any G7 nation) to fund increasing public expenditure.”

THERE are also accusations that Brown’s magnificent economic track record is, like his 2007 Budget itself, in fact based on sleight of hand. Critics argue that whenever his self-imposed Golden Rule – to borrow only to invest in any given economic cycle – looks in danger of being breached, Brown just simply lengthens the cycle or else redefines spending.

Then there is the Private Finance Initiative (PFI) which could be seen as trick that enables Brown to keep a significant chunk of government spending out of the national accounts. This is because PFI borrowing is still excluded from the PSBR (public sector borrowing requirement). PFI – now rebranded public private partnerships – therefore enables the government to boost the feelgood factor through the delivery of massive capital spending programmes without jeopardising the “fiscal discipline” of which it is so proud.

Brown’s critics on the left also accuse him of being not Stalinist but a neo-Thatcherite. In order to sustain his government’s extravagant spending programme without obviously raising taxes, they say he has been forced to sell off more of “the family silver”.

In last Wednesday’s speech, Brown said the government would dramatically step up privatisations, increasing asset sales from £18 billion to £36bn of public assets, including the student loan book.

Then there is inflation. Even though economists including O’Carroll believe this will fall towards the end of 2007 as household energy bills come back down, there are others who still believe it will rise.

This would in turn push up the cost of borrowing and could cause economic and stock market mayhem in the UK. Robin Angus, director of Edinburgh-based Personal Assets Trusts, is furious that Brown has misrepresented inflation through a shifting of definitions. In 2002, Brown changed the definition of inflation to exclude the housing market. He boasts of low inflation but it is in fact now higher than it was at any time while John Major was prime minister.

Angus believes Brown’s legacy is, in fact, highly questionable. “The Bank of England governor Mervyn King is railing against the fact that Gordon Brown has changed the measure of inflation from RPI (retail price index) to the European measure of CPI (consumer price index), which excludes house prices.

“The only way he can actually achieve the position of prime minister is to go on allowing the banking system to continue issuing unprecedented amounts of credit. That’s the only thing that’s keeping the UK going. I am old enough to remember not just Norman Lamont but also Selwyn Lloyd, and Brown is definitely the worst chancellor.

“He is a master of complication, second he is a master of deceit and can you imagine anything as cruelly stupid as his £5bn a year levy on UK pension funds. It was either done through wickedness or stupidity, there can be no other explanation. The only good thing he has done is to give the Bank of England its independence.”

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