When history balances the books, what price Brown?

Gordon Brown has been the longest serving Chancellor since Nicholas Vansittart (1812-23). Within days of achieving office in May 1997 he established his authority by the paradoxical means of delegating authority. Notwithstanding the Labour party’s searing experience with an independent Bank of England in the late 1920s and early 1930s, and despite folk memories of ‘a bankers’ ramp’, Brown decided that Labour had more to gain than to lose from granting operational control over monetary policy to the Bank.

In a way, the two most important decisions for which his chancellorship is likely to be remembered were negative ones. In addition to Bank of England independence, there was the determined stand Brown took not to subsume the pound sterling into the single European currency.

Whatever the longer-term developments in the British economy, both of these decisions can be seen as having had positive effects from Brown’s point of view. Unlike such Labour predecessors as Roy Jenkins or Denis Healey, Brown has never seemed to be especially interested in economic policy per se. It has been specific subjects such as his determined mission to reduce poverty — both here and, even more ambitiously, abroad — that have evoked his passion.

The point about the delegation of monetary policy was, first, that it gave him the time to be a more broad-ranging Chancellor than many of his predecessors and, secondly — a sine qua non of his strategy — it helped him to win the confidence of the financial markets. After all, Brown is an historian, with a particular interest in the history of the Labour party. Every previous Labour government had suffered at the hands of the financial markets: Ramsay MacDonald (in 1929-31), Clement Attlee (with the devaluation of 1949), Harold Wilson (the 1967 devaluation) and James Callaghan (the 1976 crisis and the humiliating approach to the IMF).

Brown resolved that if he was able to pursue ‘Labour’ policies (redefined, during seemingly endless negotiations with Tony Blair, as ‘New’ Labour) he must eschew a derailing financial crisis by whatever means it took. So, in addition to the moves with the Bank, and the non-move towards the single currency, he also placed great emphasis on ‘fiscal rules’ designed to impress the financial markets that he had imposed a self-denying ordinance on Labour’s traditional proclivity to spend taxpayers’ money.

Approaches to economic policy which pleased the financial markets also tended to please those ‘Middle England’ Conservative voters whom New Labour in general and Tony Blair in particular had done so much to cultivate in opposition. This continued in office to the extent that many traditional Labour voters became discontented; this, quite irrespective of the decision to join President Bush’s invasion of Iraq and what turned out to be an economy with the truth about the ‘intelligence’.

Brown has had an extraordinarily good run as Chancellor. His public image may be dour, but for most of his chancellorship he has been widely respected. It has only been towards the end that doubts have begun to creep in — among professionals, because the Treasury did seem to go in for a lot of ‘revision’ and ‘adjustment’ of the fiscal rules, and among the wider public, because there has been a great deal of negative publicity about ‘off balance sheet’ financing, via the Private Finance Initiative (PFI) under which essentially public sector projects have been privately financed and operated, a practice introduced by the Conservatives in the early 1990s but much expanded under Labour.

So what have been the positive aims and achievements of Brown’s chancellorship, at which his cautious approach has been aimed? Here there has been one obvious goal and one not so obvious one. The obvious objective has been the improvement of Britain’s public services and the infrastructure generally. After the years of Thatcherism and John Major’s shorter term (1979-90 and 1990-97) there was a widespread perception in Britain (and among overseas visitors) that, whatever the putative economic achievements of the Conservative governments of 1979-97, there had been a certain contempt for the public sector, epitomised in the famous remark attributed to Mrs Thatcher, that ‘there is no such thing as society’.

But it has to be said that, after a good ten years of New Labour — the equivalent of the period from the beginning of the Second World War in 1939 to two-thirds of the way through the Attlee governments of 1945-51 — the verdict is mixed.

At a macroeconomic level, things for most of the period have looked wonderful. After the disastrous adventure with the exchange rate mechanism of 1990-92, Chancellors Norman Lamont and (from 1993) Kenneth Clarke presided over a remarkable economic recovery. This was assisted not least by the devaluation of the pound on and after Black Wednesday (16 September 1992) and the greater confidence in British economic policy that was built up when Clarke involved the Bank of England more openly in decision-making, with the semi-public meetings of Chancellor and Governor, that came to be known as ‘the Ken and Eddie Show’.

Gordon Brown has seldom missed an opportunity to point out that the economy recorded fairly solid growth in every quarter of his Chancellorship — as indeed it had done after Black Wednesday under the Conservatives.

Unemployment fell for much of the 1997-2007 period (although it has begun to rise in the last year) and was certainly not the political issue it had been in the 1980s. But an examination of trends in average real incomes (after adjusting for inflation) shows a decline in the rate of growth from 3.1 per cent a year in Brown’s first term as Chancellor (1997-2001) to 1.7 per cent in 2001-2005, and a mere 1.3 per cent since then.

The reduced rate of growth of average incomes (it is notorious that people at the top end of the income scale, most notably in the City of London, have been having a field day) partly reflects the greater emphasis that has been placed on higher public spending — which has inevitably involved higher taxation.

Yet, as noted, the results are mixed. As part of his strategy of winning the confidence of the financial markets and ‘Middle England’, Brown accepted a two-year freeze on public spending at the beginning of his Chancellorship — a freeze inherited from his predecessor Kenneth Clarke, but a plan that Clarke himself subsequently conceded that he had had no intention of sticking to. The result was that the public services got worse before they got better, this being especially so of the privatised railways.

Then, to make matters worse, once the limits were relaxed on public spending, it took another year or two before Whitehall departments got used to spending again. For all the concern Brown had displayed about Conservative neglect of the infrastructure, public sector investment in 1997-2001 was in fact lower than during comparable periods under the previous Conservative governments.

Eventually famine was followed by feast, with the inevitable result that there were many accusations of ‘waste’ and insufficient ‘reform’. The handling of one of the Chancellor’s pet projects — reform of the welfare system and the alleviation of poverty, involving a deliberate programme of ‘redistribution’ — was also less than ideal.

So nervous was Brown of the Conservative press that, just as his preferred route for raising taxation was by ‘stealth’, so his help for the poor had a clandestine aspect to it. The ironic consequence was that a successful, if modest, programme of redistribution of income, leading to a reduction in ‘measured poverty’ during much of the period has been followed by a much-publicised reverse in the middle of the decade, when the number of children defined as living in poverty rose by several hundred thousand.

Gordon Brown has been a powerful Chancellor, whose remit stretched into many areas of policy denied to his predecessors. Under him the Treasury has been transformed from a department that, apart from its supervision of overall economic policy, has been charged principally with controlling the level of public expenditure to one where decisions on economic policy have been left to the Bank of England, and public spending (after that initial freeze) has been positively encouraged by the Treasury, most notably on health and education.

As his Chancellorship draws to a close, it is becoming apparent, not least in the Treasury’s own published plans and commitments, that the glory days of public spending are now over: spending is budgeted to grow at a mere 1.9 per cent a year in real terms, as against over 4 per cent a year in earlier years, and a projected underlying growth rate for the economy as a whole of some 2.7 per cent.

The stewardship of the Monetary Policy Committee has been widely considered to have been a success, not least because the terms within which it operated have been more conducive to economic growth and employment than those of the European Central Bank. (Your correspondent has met many a Continental official who has said privately that it was a wise decision on the part of the UK not to join the euro area.)

Perhaps the biggest blot on Brown’s reputation in the closing days of his Chancellorship has been the popular view that the removal of tax relief on pensions funds has been responsible for the pensions ‘crisis’.

In fact the origins of that crisis are more complicated, and this was only one relatively minor factor, by comparison with the impact of increasing longevity and lower returns on investment. More damaging perhaps to Brown’s reputation has been the way he and his colleagues have fought against the release of Treasury documents requested under the Freedom of Information Act, which Brown himself has long championed, and then been accused of misrepresenting the CBI’s position in the matter.

Whether Brown is the greatest Labour Chancellor is open to debate. There are many who believe that Roy Jenkins, during his brief tenure of the Treasury (1968-70) did a brilliant job in clearing up the devaluation mess of 1967, and it has to be said that the problems encountered by Brown — when inflation was already low, and kept low by the forces of ‘globalisation’ and weaker unions — were as nothing compared with the problems encountered by Denis Healey in 1974-79.

All in all, however, Chancellor Brown is likely to go down in history as one of the best and most successful Labour Chancellors ever, and it has been no mean achievement to avoid the kind of financial crisis that afflicted so many of his predecessors.

William Keegan is Senior Economics Commentator for the Observer. He is the author of ‘The Prudence of Mr. Gordon Brown’ (John Wiley & Sons, 2003).