By Ruth Lea, Senior Fellow, Economy (September 9, 2008)

THERE is little doubt that the economy is skirting recession. GDP, the measure of total economic activity, was flat in the second quarter of this year. And most economic indicators are indicating that conditions are deteriorating.
The highly respected OECD suggested recently that the UK economy would, indeed, slip back in the second half of this year and record two consecutive quarters of “negative growth”, which would mean a recession in the technical sense.

A toxic brew of high commodity prices, though, thankfully, oil prices are now easing, and the continuing credit crunch, is driving the economy down. The Bank of England is between a rock and hard place. There is pressure on it to cut interest rates to alleviate the difficulties in the housing market and rising unemployment, but its remit is to control inflation, which is still rising.

The “nice” decade of “non-inflationary continuous expansion”, as Bank Governor Mervyn King has described the period from the mid-1990s to the mid-2000s, is comprehensively over.

Contrary to Gordon Brown’s hubristic claims at the dispatch box in budget speech after budget speech during this period, these happy economic circumstances were not of his doing but a lucky combination of the economic golden legacy that he inherited from the outgoing Conservative Government in 1997 – and exceptionally benign international circumstances.

It is at times like these, when confidence in the economy is increasingly shaky, that there is a need for a Chancellor in whom we can have confidence. But this cannot be said of Alistair Darling’s performance to date. Of course, his problems are not all his doing. Whereas Brown inherited a thriving economy from the Tories, Darling inherited a damaged one from Brown.

Chancellors should, first and foremost, be careful custodians of the public purse. And, secondly, ensure that tax and regulatory systems for all users, whether personal or business, are as easily understood and straightforward as possible.

Alas, Brown, for all his reputation as a great Chancellor, fails on both counts. The public finances are a mess and the tax and regulatory systems, endlessly tinkered with by Brown, are horrendously complex.

The story of Gordon Brown’s flirtation with Prudence has been told many times. But, in truth, Prudence was dumped in the early 2000s, when he left her for another. Over the decade from 1998 to 2008, state spending rose in total by more than 80 per cent, significantly greater than the growth in GDP.

Much has been wasted. But waste apart, the public finances, which were heading towards the black when the Brown became Chancellor, are now an
increasing sea of red ink. At the time of the Budget, Darling forecast public borrowing of £43bn for this year. Sadly, it could be nearer to £60bn.

There is now little left in the cupboard, especially after the £2.7bn tax giveaway to compensate losers from the abolition of the 10p tax band. Any further measures to revive the housing market – the recent measures were a £1bn damp squib – and/or help for those in fuel poverty, can only be thin gruel. The economy grew well for a decade and generated considerable revenues. The Treasury’s coffers should have been bolstered at that time for spending in a rainy day. Well, it’s raining now, and the coffers are empty.

Turning to the tax regime a good indicator of its complexity is provided by Tolley’s yellow Tax Handbook, the tax bible. Brown increased tax legislation so much that Tolley’s guide has doubled in size since 1997. The cost of complying with this makes our companies uncompetitive and explains graphically why so many are taking the radical decision to up sticks and leave the UK.

Darling cannot, therefore, be blamed for his inheritance. And there is another reason for suspecting that his poor performance is not all of his own doing. The Press regularly carry stories, speculative or otherwise, about interference from, and Darling’s clashes with, Number 10.

But having said that, Darling is the Chancellor of the Exchequer and head of the Treasury. The buck really should stop with him when it comes to the handling of economic policy. And it has to be said that, whatever the mitigating circumstances, his tenure at Number 11 is strewn with mishandled issues. They range from Northern Rock, to the taxation of “non-doms”, the changes to the capital gains tax regime and the tax compensation package for the losers from the abolition of the 10p band.

Added to which, proposals such as the retrospective windfall tax on energy companies are allowed to run for far longer than they should, suggesting that he is not in control of economic policy. Such events breed uncertainty and, given the current economic climate, are especially damaging to business and economic confidence.

Darling’s comment that the economic conditions faced by Britain and the rest of the world are “arguably the worst they’ve been in 60 years” and will be “more profound and long-lasting than people thought” was extraordinary. Of course, he should be honest about the economy’s woes, unlike his predecessor. But such a remark, which bordered on hyperbole, was irresponsible and, unsurprisingly, the already beleaguered pound fell further on the comment.

The economic circumstances are clearly not as poor as they were in the mid-1970s, or the early 1980s or even, yet, the early 1990s.

In troubled economic times, we need economic leadership. The respective incumbents of Number 10 and Number 11 should bury their differences, if, indeed, they have differences, and provide it.

Published in the Yorksire Post here

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