Thursday, 15 May 2008

Sink the Bismarck!

Gordon bismarck

Is there any chance of redemption for Gordon Brown? To read the headlines it is more like resurrection than redemption that is needed.

Throughout his time as Chancellor, with the winds of economic growth, negligible inflation and historically low interest rates pushing him along, he comfortably balanced the books of the country and rejoiced in his own competence.

He liked to be known as the ‘Iron Chancellor’ – a moniker purloined from Otto von Bismarck, the 19th century Prussian statesmen responsible for German unification (the first time around).

But will Brown share the fate of Bismarck’s namesake battleship from WWII, destined to be holed below the waterline and sunk without a trace in these choppy political waters?

In the ‘nice decade’ as Mervyn King, the Bank of England Governor coined it yesterday, Brown’s stewardship of the economy was a central plank of New Labour’s claim to be the rightful rulers. And in the wake of the Conservatives' then recent economic failings he could hardly have asked for a starker contrast to his own apparent talents. Indeed such was the rate of economic growth (fuelled as it was by a sustained but ultimately unsustainable property boom, and surging world markets that Britain couldn't fail to benefit from), Gordon was able to get away with some astonishing slights of hand.

Perhaps the most notorious was the abolition of pension scheme dividend tax credits in his first Budget in 1997. With a stroke of a pen he denied pension funds the ability to reclaim £5bn a year from the exchequer, ultimately adding to the woes of pensioners for a generation. It's estimated that pensioners are £100bn out of pocket thus far from this raid on long term savings.

Then there was the outright scam that was the manipulation of his own ‘Golden Rule’, wherein he promised to borrow only to fund capital spending and not current expenditure. In 2002 he did just that, with an increase in the deficit to allow him to fund teachers’ pay and the like. He then modified his rules to allow himself the full ‘economic cycle’ of 1999-2006 over which to bring borrowing back in line, moving the goalposts without a twinge of embarrassment. The Tories, still languishing in self-induced unelectability, could only look on.

In 2007 Brown came under fire for selling off over half of the country’s gold reserves when gold prices were in the doldrums. It’s estimated that decision alone cost the UK £2bn.

Over the last 7-8 years petrol and diesel prices have steadily but inexorably risen, and with them the tax take. Over the government’s life from 1997 to date oil has risen from less than $20 a barrel to more than $120, but despite limited concessions on the timing of duty increases the tax take on fuel, 81.5% of the cost at the pumps in 1997, has remained high – still at over 60%. Sounds like it’s come down doesn’t it? But when petrol was 70p a litre 10 years ago and £1.20 a litre now, that still gives the Treasury an extra 20p per litre in tax and duty. As I’ve asked before, where is this money going to? I’m fairly sure I’m not the only one to have noticed that all these billions don't seem to be making their way back into the schools, hospitals and police stations.

Tax freedom day – when the average Joe starts to earn money for himself instead of to pay taxes, has moved from 25th May in 1997 to 3rd June in 2008. So Gordon really has been taxing you more. Again, as if you hadn’t noticed.

Of course more recently he has surpassed himself as Prime Minister with the 10% tax fiasco and its equally calamitous ‘solution’- itself relying on borrowing £2.7bn to give to the low paid. And the failure to call an election at the end of last year, after fuelling speculation that he wished to gain public endorsement of his succession of Blair by going to the polls, is viewed by many as cowardice.

Unbelievably Gordon took a swipe at pensions again with the introduction of the 20% tax rate, which now means that tax relief on pension contributions for those on the basic rate of income tax will be worth 2% less than before April. Many will not realise until it is too late, and those that do will have to find the extra contributions out of disposable income.

So it is starting to look a lot like Gordon was reaping the benefits and accepting the plaudits for fiscal abilities he didn’t really have. In fact it might be said that he was mortgaging our futures to pay for his spending yesterday and today – higher budget deficit, lower pensions step forward as evidence please.

Even the much vaunted independence of the Bank of England, granted by Brown in 1997, is now looking like a shaky decision. In the late 90s when the memory of Tory incompetence with the setting of interest rates was fresh (anyone have a mortgage when rates shot up to 15% when we crashed out of the ERM?), independence from political control looked a good move. Look now. Mervyn King has his hands tied. His remit is to keep inflation under 2% by administering a higher base rate if it shows signs of going up. He now faces rising inflation in a stagnating economy. If he pushes up interest rates to beat down inflation (currently 3.7%) he risks exacerbating the credit crunch and further harming industry, already teetering on the edge of recession. And all those home owners with increasing mortgage payments would not look favourably on him either. If he cuts rates to encourage investment, he goes 'off message' on his inflation-bashing duties. As it happens King has stated that he does not see a case for dropping interest rates over the next two years. So what will happen when inflation, pushed up and up by fuel and food prices, gets out of hand? What fiscal policy will Gordon be able to bring to bear when the Bank has no monetary guns to fire?

Gordon’s legacy is becoming apparent; the chickens are homeward bound and ready for slumber.

Even if, as he claims, he is the man to bring about a reversal of economic fortunes I seriously doubt the electorate would agree. That wind that billowed in his sails in his ‘nice decade’ has turned to a howling wind of change, and I think that this time there will be no escaping the tempest for Brown.

Time, I think, for the lifeboats.

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