BBC On The Record - Broadcast: 17.11.02

Film: Paul Wilenius outlines the UK's economic problems and the consequent dangers to the Chancellor of the Exchequer's spending, tax and borrowing plans ahead of his pre-budget statement.

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 present. 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 going wrong. 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. ACTUALITY: 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. ACTUALITY. 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 she sends. 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.
NB. This transcript was typed from a transcription unit recording and not copied from an original script. Because of the possibility of mis-hearing and the difficulty, in some cases, of identifying individual speakers, the BBC cannot vouch for its accuracy.