"things are seriously amiss with the British economy"
The so-called "economic miracle" is unravelling. Will the Tories seize their chance ?........
Gordon Brown's Potemkin economy
The Business Online. October 02, 2005
AFTER poking fun at Germany for having two pretenders to lead it after an indeterminate general election, Great Britain now finds itself in a similarly ignominious position. Chancellor Gordon Brown addressed the Labour Party conference in Brighton last Monday presumptuously accepting the leadership of party and country, which he has always coveted as his by right; then Prime Minister Tony Blair popped up the next day to announce he was going nowhere, unveiling a programme for a Parliament to prove it. Thus does Britain continue to be governed by a dysfunctional duo whose warring camps spend as much time trying to undermine each other as they do running the country. To avoid bumping into his great rival too often in London's corridors of power, Mr Brown announced he will embark on a year-long tour of the nation to find out what is on the minds of his grateful people, much as Prince Regents used to tour the realm before taking the throne. His plan is to flesh out his personal manifesto, the bones of which he revealed in Brighton, presumably to be implemented when he takes over as Prime Minister from Mr Blair, by 2007 if Mr Brown has his way, perhaps not before 2009 if Mr Blair has his.
Instead of running premature victory laps around the country, however, Mr Brown would be better off focusing on his day job of running the British economy, which is running into serious trouble. For several years this newspaper has been a lone voice in arguing that Mr Brown is not the economic miracle-worker he and his unquestioning cheerleaders in the media would have us believe. The evidence is now moving so convincingly in our direction that even an economically ignorant British media is beginning to realise it. Under his eight-year watch as Chancellor, Great Britain has slumped from being the fourth most competitive economy in the world in 1997 to 13th this year, according to the authoritative World Economic Forum. The pace of this decline is quickening: last year Britain slipped two ranks, overtaken by Australia and the Netherlands. In recent weeks a cascade of devastating data has confirmed that the bloom is very much off the Brown economy.
It grew by only 1.5% in the year to the end of the second quarter, its weakest performance since the first quarter of 1993. Quarterly growth in the second quarter was a mere 0.5%. Over the past year, the American economy has grown by 3.6%, the euro zone by 1.1%; so Britain is still doing better than the euro zone, the tortoise of the world economy, but only just. Falling or static house prices, weak consumer confidence, sluggish business investment, rising unemployment, higher oil prices and the debilitating effects of massive tax hikes coupled with a bewildering increase in red tape, are all taking their toll on the British economy and Mr Brown's reputation. The Chancellor, of course, is still in denial: last week on the BBC he refused to accept that retail sales were in trouble; typically, the interviewer did not have the facts to challenge him. So here they are: only 26% of retailers reported sales volumes were up on the year in September, against 50% who said they were down; the result was the worst balance in the
22-year history of the Confederation of British Industry's retail survey.
Those who have been bedazzled by the Brown magic are in for a rude awakening; but as this newspaper has endlessly pointed out, until now to no avail, there never was much Brown magic in the first place - just at lot of hot air and bombast, manufactured by the Chancellor himself and helpfully promulgated by a complicit media. Now that the heady days are over for Mr Brown it is time for his cheerleaders to realise that he has enjoyed an easy and sometimes lucky ride as Chancellor and that, rather than his supposed skill as an economic manager, explains why the economy has performed reasonably well during his tenure - though nowhere near as well as Mr Brown would have us believe. True, the British economy has now grown for 53 consecutive quarters; but the first 19 and a half of these took place under unimpressive Tory rule. Mr Brown has been Chancellor for only 33 and a bit of these 53 quarters; and the economy actually grew faster during the Tory period, when the compound rate of growth was 0.77% a quarter, against 0.69% during Brown's period (and that despite constant and controversial adjustments over the past two years to the way the economy is measured, all of which have conveniently enhanced Mr Brown's record). When looked at in annual terms, the British economy grew for 26 consecutive years between 1947 and 1973 under Tory and Labour governments - and with a faster average growth rate, despite a few negative quarters. That puts Mr Brown's eight and a half years in their proper historical perspective.
A major reason why economic growth is now slowing is that productivity has ground to a halt because of declining competitiveness, weak capital spending and extraordinary waste in the public sector - the three real hallmarks of the Brown years. Output per hour worked - a popular measure of productivity - grew by an abysmal 0.3% in the year to the end of the second quarter, Britain's worst performance since officials began to compile the data in 1993. The British economy is now forced to rely on greater numbers of people working to continue growing. Output per worker - another measure of productivity - crept up by just 0.5% in the year to the end of June, the slowest year-on-year growth since 1990. Mr Brown has talked obsessively about raising Britain's productivity game; but the more he talks about it, the worse it gets. The blunt truth is that Britain has suffered a collapse in productivity growth under Mr Brown: the average year-on-year rate has been 1.68% since 1997, down from 2.74% between
1992 and 1997. Britain is also falling behind: the gap between British productivity and the higher average of the other G7 countries widened in 2004, after several years during which it had closed.
The Chancellor has direct responsibility for this lacklustre productivity record. Productivity growth in the public services, on which Mr Brown has carelessly lavished extra billions upon billions, has been negative for four years in a row and was negative again in the first six months of this year, according to estimates by Citigroup. An increasingly bloated state sector has become the ball and chain holding back the British economy. Yet Mr Brown's public-sector recruitment binge shows no sign of waning and he has done his best to block any real reform of the public services, much to Mr Blair's dismay. He has also failed to implement any of the efficiency gains promised after the Gershon report on the public sector - though it should not be forgotten that Mr Brown never promised to cut 70,000 jobs, as most reported wrongly at the time; he only ever talked of cutting "posts", an altogether more malleable concept. True to form - and according to Mr Brown's favourite measure of public sector jobs (produced by the pliable Office of National Statistics) - there have been no cuts: those on the state's payroll increased by 95,000 (1.7%) in the 12 months to the second quarter of 2005, taking the total to a massive 5.846m, a figure boosted by some incredible pseudo-jobs in local councils and central government; and, despite promises to reduce the number of civil servants, the size of the Civil Service remains unchanged.
Even these figures conceal the real number of people who depend on the state for their livelihood (they leave out NHS GPs for example). An alternative but little-known poll produced by the Office of National Statistics, which asks people whether they work for the private or public sector, found that almost 25% now claim to work for the state, equivalent to almost 7m people - a huge, active and articulate blocking minority against public-service reform. In addition, 69% of households are now in receipt of at least one state benefit; 22% of the population are on income-related benefits; 15% are on tax credits. Even excluding those who work for the state, 30% of the population now derives more than half their income from state support. The most recent figures from the OECD show that public spending has surged from 37.5% of GDP in 2000 to a predicted 44.5% this year and 44.8% in 2006. The public spending gap between formerly lowish-spending Britain and the high-spending euro zone has narrowed from 9.5 points of GDP five years ago to 3.5 points by next year.
Under cover of meaningless rhetoric praising American-style enterprise, Mr Brown is fast turning Great Britain into a Scandinavian-style socialist society. In much of the country he has already succeeded: in Wales and the north-east of England, public spending now accounts for
59% of local gross domestic product (GDP); in devolved and socialist Scotland it is 52%; in London and the south-east of England, which pick up these bills for the rest of the country, public spending is around an American-level one third of national income. With more and more people depending on government handouts, contracts or jobs, it is hardly surprising that the dynamism of the British economy is being sapped or that the rate of company creation among young, entrepreneurial Brits now lags behind that of their counterparts in other English-speaking countries. The Brown spending splurge is deflecting resources and personnel away from the private sector, putting upward pressure on inflation and forcing the Bank of England to keep interest rates at a level that is too high for the health of the private sector. Annual inflation measured by the consumer price index (CPI) - the government's target measure - is accelerating, hitting 2.4% in August, the highest since the series started in 1997. CPI inflation was only 1.1% as recently as last September.
Inflation is being boosted by Mr Brown's budget deficits, which continue to grow. So far this financial year (which started in April) public sector net borrowing has hit £20.8bn, £2.3bn higher than last year; indeed public borrowing between April and August was the highest since the dark Tory days of 1994. Mr Brown's Britain is now borrowing even more than the Euro zone: last year the Euro zone deficit was 2.7% of GDP; Britain's deficit, on the comparable measure, was 3.1%, according to Eurostat. Mr Brown is now in his fifth consecutive year of over-optimistic fiscal predictions: by the end of it he will have borrowed £138bn more than his forecasts in the 2001 Budget. Remember that next time you read or hear some journalist or commentator claiming that Mr Brown has the uncanny knack of accurate prediction. There is, of course, more deficit trouble on the way: despite the soaring price of oil which, thanks to the North Sea, is good for Mr Brown's coffers (especially following his surreptitious move to bring forward tax payments by oil companies at his last Budget), government revenue growth of 7.2% so far this year remains stubbornly below the Treasury's 8.3% forecast for the full year; but central government current spending and total public investment is surging by 7.8%, above the Budget plans for spending growth of 7.2%.
None of this was even mentioned in Brighton by Mr Brown, who has bigger fish to fry. He is too busy preparing for his 10-year ascendancy to worry about something as petty as economics. But he presides over a Potemkin village of an economy, a fictional narrative which he recites so often that a lazy media largely believes it, even when it should be obvious to all that the pseudo-miracle is unravelling. As the gap between Mr Brown's rhetoric and reality widens, however, it is at last dawning on even the gullible that things are seriously amiss with the British economy, that Mr Brown's glory years as Chancellor are over and that, when he eventually gets the keys to 10 Downing Street, he will be seriously damaged goods. That, of course, is the Tory opportunity. As the Conservatives gather for their conference in Blackpool we will discover this week if they have the brains, guts and leaders to grasp it. We do not advise our readers to hold their breath.