HUMPHRYS: Gordon Brown is about
to tell Parliament how he sees the state of the British economy. We can
expect him to be less optimistic than he's been in the past. House prices
might still be booming but that's about all that is. The only thing that's
keeping the economy moving along these days, is consumer confidence. Are
we right to feel so up-beat? Well until now, Gordon Brown has managed the
trick of spending more on public services without scaring us too much with
his tax rises or borrowing too much. But there are some very dark clouds
on the economic horizon and he may have to push his hand much deeper into
our pockets and borrow billions more. As Paul Wilenius reports, Mr Brown
is under a lot of pressure.
PAUL WILENIUS: The love affair with prudence
has been deep and rewarding for Gordon Brown. Although their relationship
has been strained recently, the Chancellor still craves approval for his
handling of the economy. That his public spending is justified, his tax
rises are stealthy and his borrowing affordable. Now the messages between
the two are more chilly and there are fears mounting troubles with the
economy could lead to a long term breakdown of their relationship.
Here in the Treasury's
new home, Gordon Brown is putting the finishing touches to his Pre-Budget
Report. But it'll be a far gloomier affair than anything that's gone before.
Indeed the Chancellor already knows the British economy has suffered a
slowdown and there's nervousness about the global economy. He'll have to
borrow more to fund a huge rise in public spending and there's a threat
of war with Iraq. And now the delivery of better public services could
be undermined if there's an explosion in big public sector pay demands.
KENNETH CLARKE MP: All in all we are very complacent
in this country at the moment about an economy that is actually in great
danger. Not in trouble yet but slowing down, people feel better off and
actually the economy is in a very, very risky situation.
WILENIUS: The message Gordon Brown
has been receiving on the economy recently, hasn't been uplifting. Even
if shoppers spend freely at Christmas, and the housing boom continues,
overall the economy is slowing down. His last Budget forecast was that
the British economy would grow by 2.5 per cent. With manufacturing and
parts of the service sector struggling, many experts say this forecast
will have to be cut to only 1.5 per cent. That could mean a huge drop
in the tax he collects, as business is not making so much money.
MARTIN WEALE: The Chancellor had hoped
for growth in the range of two to two and a half per cent and it now looks
like being only about one and a half per cent. That of course means that
tax revenues are weaker than he had hoped, so government borrowing is going
to be bigger and it's quite possible that this year current expenditure
will be larger than current income.
GEORGE COX: A lot of the service sectors
are suffering very badly indeed in the city, the merchant banks, the IT
industry, advertising. You have an awful lot of sectors there which are
doing far worse than manufacturing so we have a multi-speed economy at
WILENIUS: Here in his new office,
Brown will be wondering what can he do to lift economy. Under his leadership
the Treasury handed over control of interest rates to the Bank of England
and they are already lower than at any time since the 1960s. And the Chancellor
can't cut taxes as he needs the money to fund public spending. That leaves
a rise in borrowing.
JOHN McFALL: He's predicted borrowing of
eleven billion pounds this year and some people are suggesting that could
go up to 14 billion or perhaps 18 billion, but let's take the worst case
scenario, say borrowing does go to twenty billion, he's still well within
the 2% of GDP and as you know Maastricht debt criteria was 3% to if he
did borrow to that extent, then he's still going to fulfil his debt obligations,
remain within the limits in terms of his economic cycle, so borrowing will
not be such a bad thing.
CLARKE: He is going to borrow like
there is no tomorrow and he will say, oh well I can afford to I have been
so prudent. Well Nigel Lawson was the last Chancellor who discovered these
are big, big figures which can get very good very rapidly while things
are going well and then they get very bad very rapidly when things are
WILENIUS: Brown's Treasury has
produced a golden rule. It says he can borrow billions of pounds, as long
as he has paid back the same amount over the economic cycle. But that may
not be as simple as it sounds.
WEALE: In the current economic
cycle Gordon Brown has a very large kitty, he's run a surplus of fifty
billion pounds so far in the cycle and his rule says that he can borrow
that without breaking the rule. Of course the difficulty is that no-one
knows when the current economic cycle is going to end, it could end next
year, it could end in 2006. If it ends next year and he then goes on having
to borrow, he will start running up debt that his rule says he has to repay
and no our worry is that with revenue being weak that may get difficult.
COX: If you are talking
about borrowing fifty or sixty billion then that blows the rule completely
out of the water, then you have a serious issue I think. I just don't
think we can borrow that kind of money to meet deficits through excess
public spending, you just can't do it.
WILENIUS: But the alternative is
more unpalatable tax rises.
However, if the economy keeps falling, the Treasury may in time have to
consider such a move to stop a black hole opening up in its finances.
COX: He is going to have
to curtail public spending which will be very difficult to do politically,
or he is going to raise taxes. But if he raises taxes ultimately that is
going to affect business because if you simply tax people through income
tax then there will be pressure on pay as well.
CLARKE: I actually think it is
inevitable that he will have to raise taxes, we are talking about when
he raises taxes not whether he has to raise taxes. He has already raised
taxes on the corporate sector, the burden of taxation in this country as
a proportion of GDP has overtaken Germany. We are becoming a high tax
country anyway but that has mainly been on business.
WILENIUS: The prospect of a second
Gulf War is another dark cloud hanging over Gordon Brown's relationship
with prudence. Wars are unpredictable and can be very costly. There could
be a sharp rise in the oil price if there's an invasion of Iraq this winter,
and if it goes on a long time it could have a negative impact on Britain's
economy and especially on the nation's finances.
COX: There could be a protracted
conflict. Or you could have a conflict which is also followed by terrorist
actions around the world internationally. So I think all of us look forward
with some concern about what is going to happen. Uncertainty is a great
constraint on business and we are seeing it now, this is what one hopes
might be alleviated if we have a speedy and successful resolution but people
will hold back in the meantime.
McFALL: If there was a protracted
war with Iraq then that certainly could have a difference to the global
economy and a knock on effect to the United Kingdom economy.
WILENIUS: What sort of effect would
that have if it does go on for a long time?
McFALL: Well it could mean that
the consumer loses confidence and if the consumer loses confidence given
the two speed economy we have at the moment then a very important engine
is taken away from the economy.
WILENIUS: A high tech intense war
with Iraq won't be cheap and there'll be no multi-billion pound bail out
for Britain from the Gulf States this time.
CLARKE: No one knows what it costs
to start a war. When you start Prime Ministers and the Chiefs of Staff
always insist we are going to spend everything that is necessary in order
to do this properly and then the unfortunate Chancellor is left facing
the effects of the bill and whatever plans he had. So I hope if we do have
warfare which I also hope we don't, but if we have warfare I hope it goes
well. If we have warfare and
its for any length of time or heaven forbid it should start getting bogged
down, then Gordon Brown's headaches will be turned into a nightmare.
WILENIUS: There's one group who
want to celebrate the end of Gordon Brown's affair with prudence: public
sector workers. Many London universities were shut last week by a dispute
over an extra �4,000 a year to cover the high cost of living in the capital.
They are joining a long line of public sector workers following the firemen
in a fight for higher wages. There are fears this could lead to a winter
of discontent involving nurses, teachers and many others.
PAUL MACKNEY: Public services are basically
the people who work in the services and they're the people that need investing
in. We've never had this degree of unity before, amongst all the staff
who work in universities. We are clearly part of a mood which there is
in the public sector which is saying, we've been patient long enough, we
voted for this government five years ago, we voted again last year, we
now expect a decent standard of living.
WILENIUS: It's reminiscent of the
old days of union strife. And it has alarmed those who want the extra public
funds to be channelled into services not pay.
McFALL: Already there have been
problems with pay regarding firemen and I think one of the messages that
the Chancellor will be putting out in his statement will be that there
has to be responsibility by public service workers because we have twin
aims here of ensuring good public services and good pay and conditions
for public workers but if we are excessive in terms of pay and demands
then the money that has been set aside for increasing the public services
will be put into a black hole.
COX: The danger that everyone
keeps pushing and leap-frogging the whole bill will grow up and if it is
not accompanied by the reform that will be a real problem. And you can
see the pressure is rising.
CLARKE: The fact is all the trade
unions, public sector trade unions are falling over themselves and gearing
up their members to persuade themselves that they really are entitled to
double figure pay increases all over again. All these people are going
to expect and I fear quite a lot of them are going to get dressed up as
productivity deals double figured pay increases then you find that, that
dribbles away this vast public expenditure without enough to show on the
ground by way of raised standards and quality performance.
WILENIUS: After the march, the
university strikers gather at Congress House in Central London for a rally.
WILENIUS: With more and more public
sector workers like these joining in the rush for higher pay, Gordon Brown
is entering a new and more turbulent period of office. The problem is,
he's used to living with a golden economic scenario and he's had enough
money to look competent and prudent. The big challenge for the Chancellor
is how he copes now that the economy and the nation's finances really are
entering troubled waters.
WEALE: I think he probably does
have to get used to the fact that he is likely to become less popular or
to be seen as less of a miracle worker, that when the economy is stable
it's easy to be a good and popular Chancellor of the Exchequer, when circumstances
get difficult then you run the risk either of letting the government's
borrowing get into a mess or of making yourself unpopular, and there isn't
necessarily a third option, no third way out of that sort of bind.
WILENIUS: So Brown doesn't really
have much choice.
He may have to stop courting prudence, as he's committed to spending more
on public services and will probably be forced to borrow tens of billions
of pounds more to do so.
COX: What I don't expect
to see from this Chancellor is a lot of flip flopping back and forth.
I think the man sets himself on a path and is going to pursue it. But
it is going to be a tough path the next three years.
CLARKE: I think we should challenge
him more on the economy, he is having a completely free ride it seems to
me but that is partly with the commentators in the press as much as with
his political opponents in the House of Commons.
Poor old prudence has been jilted completely. I mean she is one of the
old girlfriends whose letters will not be replied to. He's now taking a
totally different view. This is a reckless Chancellor, he's now boldly
going out on a different front and spending money on a scale that we really
haven't seen in this country for a very long time.
WILENIUS: No matter how many messages
No matter how much love he loses among some voters, Brown may not be getting
in touch with prudence again, for some time. He can only hope that they
can get back together one day.