The Chancellor Is Set to Go out on a High Note, Though the Music Won't Be Stirring Expect the Budget to Be Big on Themes and Short on Detail ; He Is Not Going to Dump Caution at This Stage. Why Should He?
McRae, Hamish, The Independent on Sunday (London, England)
So we know the date of Gordon Brown's final Budget at last: it is 21 March - little more than three weeks away. It will be odd, won't it, to have someone else droning away about the successes of the British economy? Maybe there will be a bit less droning.
At any rate, it will come as a relief to a lot of us to have some change, and it will of course be intriguing to see quite how Mr Brown's legacy is viewed a few years hence. But the Chancellor has to do it one more time and it appears extremely likely he will be able to present a pretty good account of himself.
Whatever view you take of the longer-term legacy - and I would side with the Institute for Fiscal Studies' judgement that there are considerable problems of finance as well as performance - he will be able to go out on a strong note. It will be a slightly better position than seemed likely in December at the time of the pre- Budget report.
Two things have gone right in the past couple of months: the economy has picked up some speed and public finances have improved a little, though perhaps not as much as they should have done given the faster growth.
The growth is the flipside of the rise in interest rates. The Bank of England increased the cost of borrowing to counter the rise in inflation and will probably do so again in the next couple of months. But it felt confident enough to do so because it was clear the economy could stand it. The better news is that the balance of growth seems to have shifted a little from consumption to investment. The former is still quite strong but the latter is now climbing at the fastest rate since 1998. That strength seems set to continue for the foreseeable future, backed as it is by high profitability.
As you might expect, companies tend to invest when they are making good profits and cut back when they are not. You can see in the left-hand graph above that this was particularly the case from the mid-1980s through to the late 1990s.
Since then, things have diverged somewhat. From 1998 to 2003, company profitability fell back a bit but investment fell much more. And since 2003, profits have shot up but investment has recovered only slowly. The most probable explanation for this is that there was a burst of IT investment ahead of the millennium (remember the fears about the "bug") and that companies needed three or four years to get the investment to bed down and generate the productivity increases expected of it.
Certainly, investment was not held back by a lack of profits. Citigroup notes that the present return on capital is the highest for at least 40 years and that this has implications for monetary policy. Just as the Bank had to hold interest rates low between 2001 and 2005 because, among other things, it did not want to discourage investment, now it is able to nudge up rates without, as yet, any fear of hitting investment.
Investment-led growth is better news for the economy than consumption-led growth. You need both but the UK has persistently excelled on the consumption side but done rather worse on investment. When the housing boom really has come to an end and is no longer stimulating consumption, we will need investment to help maintain demand. …
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Publication information: Article title: The Chancellor Is Set to Go out on a High Note, Though the Music Won't Be Stirring Expect the Budget to Be Big on Themes and Short on Detail ; He Is Not Going to Dump Caution at This Stage. Why Should He?. Contributors: McRae, Hamish - Author. Newspaper title: The Independent on Sunday (London, England). Publication date: February 25, 2007. Page number: 9. © 2009 The Independent on Sunday. Provided by ProQuest LLC. All Rights Reserved.
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