LUCY O'CARROLL, HBoS

Analysis


Regrets, he may have had a few, but the Chancellor's 11th Budget speech was not the day for them. On the economy, he reminded us that his decade in control has been the longest period of stability and sustained growth in the country's history.

On the fiscal side, he claimed to have adhered to both of his rules. On tax and spending, the heavily trailed cut in corporation tax was overshadowed by Gordon Brown's final flourish - a cut in the basic rate of income tax to its lowest level for 75 years.

How well does the reality match up to the rhetoric? This may seem a churlish question, given that yesterday's Budget was most likely the Chancellor's last. It is worth remembering, though, that Joseph Stalin - a man with whom this year's Budget will surely forever be associated - once declared gratitude as "a sickness suffered by dogs".

On the economy, the numbers are undoubtedly impressive. Activity expanded by 2.75% last year, to cap the longest unbroken run of growth in the past 200 years. Employment is at record levels. Inflation has crept up over the past year, but falling energy bills should bring it back to target later in 2007. As a result, interest rates look set to remain low by historic standards.

Furthermore, the long-awaited rebalancing away from an excessive reliance on consumer spending has finally begun, as business investment ended 2006 by growing at its fastest pace for eight years. This performance, which the International Monetary Fund described recently as "impressive", looks set to continue over the next few years. There are, however, two economic issues that might cloud the Chancellor's horizon. The first is productivity. Mr Brown proclaimed in yesterday's speech that the UK has closed the productivity gap with Japan and Germany, narrowed it with the US, and halved it with France.

But the fact that a gap still exists despite his best efforts - he was once, after all, famously enthusiastic about post- neoclassical endogenous growth theory - is disappointing, when productivity growth is vital for our long-term prosperity. The second issue is the puzzle that, despite the impressive statistics, polls show the public becoming increasingly sceptical about the health of the economy. Perhaps we have become used to stability and high employment and, instead, have turned our attention to other concerns. Domestic disposable income has trailed the growth rate of the economy overall in the past five years, as a result of tax increases, higher energy bills, rising interest rates and subdued wage growth. Since the Budget forecasts show disposable income continuing to grow more slowly than the economy overall in the next few years, discontent could remain a risk - and it is presumably this risk that yesterday's income-tax cut was designed to tackle.

But the Chancellor does not want us to judge his legacy solely on the performance of the economy. Turning to the fiscal side, yesterday's speech was the perfect occasion to announce that his golden rule of borrowing only to invest over the economic cycle had not only been met, but with a comfortable surplus of £11bn. The sustainable investment rule - that debt should remain below 40% of national income - had also been achieved.

Mr Brown confidently predicted that both rules would continue to be met during the first five years of the new economic cycle, which begins this year. The UK's fiscal position has certainly improved since the early 1990s, with debt and net borrowing both falling as a share of national income. But judgment of our fiscal performance on the basis of the Chancellor's rules, particularly the golden rule, has become problematic.

In Budget 2005, for example, the cycle was estimated to be a seven-year one running from 1999. By the time of the Pre-Budget Report only nine months later, the cycle's start date was moved back to 1997 and its end-date stretched out to 2009. A year later, the current estimate of a 10-year cycle ending this year was put in place.

There may have been perfectly legitimate economic reasons for redating the cycle, as figures have been revised and migration has risen sharply. However, there is an inevitable suspicion that the shifts are as much to do with political expediency as good economics, particularly as borrowing forecasts have crept up in recent years. At the very least, the golden rule lacks clarity.

Finally, despite the welcome cut in corporation tax and the unexpected flourish on income tax, there was relatively little room for manoeuvre on tax and spending in yesterday's Budget. Indeed, the Chancellor admitted as much when he stated the Budget would be "broadly neutral". What he gave with one hand, he inevitably took with the other - removing the 10p starting rate of income tax and cutting capital allowances.

So now that the end is near, what is his legacy? On the basis of yesterday's Budget, it is an economy in good shape, but with a number of outstanding issues. Overall, though, it is hard to imagine life beyond Gordon Brown. Indeed, as senior civil servants have recently let slip, one thing is beyond dispute: whatever he did, he did it his way.

  • Lucy O'Carroll is director of research for HBoS Treasury Services