The Chancellor's Challenge: Is Gordon Brown Ready to Establish a New Pattern of Spending and Taxation?

Article excerpt

An unintended irony of Labour's first year in office is that the currency crises that hit previous periods of Labour rule with hurricane force have, this time, left a trail of havoc on the other side of the world, but sterling remains unscathed (indeed, overvalued). This experience reflects a more sophisticated understanding by Labour of international currency and capital markets: in particular, the need for monetary and fiscal policy to be transparent, internationally benchmarked and free from short-term political manipulation. The establishment of an independent central bank was a key step in this process; the next should be a fiscal responsibility act establishing comparable disciplines for the Budget. If there is a strategic flaw in the government's response to globalisation, it has been the fateful decision to sit out the first five years (or more) of EMU and the establishment of a zone of exchange-rate stability.

Within this strategic framework there are economic policy debates opening up which the Budget should clarify. One centres on the apparent enthusiasm of the Chancellor for repaying the national (ie, public) debt. The Chancellor is right to be prudent, though it is difficult to see in British economic statistics any sign of a Latin American or Asian or Italian debt problem. There is also a legitimate cyclical concern about the UK economy: that a tight budget is necessary to ease up ward pressure on interest rates and sterling.

The longer-term case for accumulating budget surpluses is less convincing: it represents a bleak vision of the economic role of the state, that no public spending can be found that will produce a higher social return than the interest on government debt. Coming after prolonged starvation of public spending and investment, this is an extraordinarily pessimistic perspective.

The crucial question is how far overstretched public services, especially health and education, can be more generously financed in a fiscally responsible way. One option is to take a somewhat more relaxed view of the public debt problem. The second is to be a little more courageous about the need for additional personal taxation. The third is through decentralisation. There is no good economic or democratic reason why local authorities that want to spend more on services and schools, and are willing to face the ire of their electorates by raising council tax, shouldn't be allowed to do so. A combination of these measures would also ease the tension between the government and its own supporters.

Because of the government's self-denying ordinance on public spending and personal taxation, the main interest in next week's Budget will be at the micro level. A key challenge is to use tax reform to minimise the disincentives to work and save among low-income groups. …