The Chancellors' Tales
By Howard Davies (2006)
At the time of writing, the general consensus is that Gordon Brown is a lousy Prime Minister but was a great Chancellor of the Exchequer. In years to come, I believe the consensus will be that he was lousy at both jobs.
Throughout his tenure of 11 Downing Street, Gordon Brown claimed the credit for 10 years of economic growth and prosperity. Week after week, Brown trotted out the statistics of the economic miracle he claimed to have masterminded.
In reality, the economy grew in spite of Brown, not because of him.
Since 2001, Brown has sanctioned staggering levels of expenditure on a bloated and ever-expanding public sector without requiring reforms or efficiencies in return.
As a result, he has squandered all the proceeds of our decade of economic growth and left the country with nothing in the kitty, now the world economic winds have changed direction.
Brown's legacy is as follows: economic growth is stagnating, inflation is rife and consumer prices (in particular those of food and oil) and mortgage interest rates are rising, while asset prices (like those for houses and shares) are falling. So we are all feeling poorer.
Meanwhile, the government's budget deficit and the national debt are at their highest ever levels. Consumer debt is at its highest ever level. The British tax system is so complex, no one can understand it. A major British Bank has gone bust and has had to be nationalised at a cost to the tax-payer of £50 billion.
The list goes on...
Financial markets are in turmoil. The corporate credit markets are all but shut. All confidence in our financial regulators has been lost.
In short, we face a possible return to the nightmare scenario of the 'stagflation' of the 1970s - stagnation combined with inflation.
An even more serious problem - perhaps the most serious of all those we face - is that Brown has caused the biggest crisis in our old-age pension system since it was invented. By reducing the tax credits on dividends he has torpedoed people's pension provisions and left an ageing population facing financial ruin in their dotage.
So why was Brown able to pull the wool over our eyes for so long?
First, Brown inherited possibly the rosiest economic picture ever for an incoming Chancellor. Kenneth Clark, the previous Chancellor within the outgoing Conservative government, had left Britain in an immensely strong economic position. In 1997, when he handed over the economic reigns to Brown, the economy was growing at a rapid rate, inflation was low and there was a budgetary surplus. Anyone would have made hay under the glow of this warm economic sunshine.
Ironically the seeds of the Tories' downfall and Brown's rosy inheritance were sown in the episode that tarnished the Tories' own reputation for economic competence.
And yet, in retrospect it was not a distractions event at all, but rather a stroke of good fortune.
In Howard Davies' book, the records of all these Chancellors of the Exchequer are reviewed, including those of Margaret Thatcher's great Chancellors - Geoffrey Howe and Nigel Lawson - father of Nigella.
His book is a history of the British ecinomy over the last 30 years, as it transformed itself from the stagflation of the 1970s - with manufacturing industry in the doldrums - to the service economy of today.
But now back to the story of Brown...
By 1997, the British electorate had tired of 18 years of Conservative government and welcomed Tony Blair's New Labour Government to take over, with Brown as his Chancellor. In no small part, New Labour's success was due to the events of 1992, when Britain was bounced out of the Exchange Rate Mechanism. 16th September became known as "Black Wednesday" as the then Chancellor, Norman Lamont, was forced to raise interest rates again and again, while buying huge quantities of sterling currency in the money markets, in a desperate attempt to keep the pound at its designated rate.
As currency speculators, including George Soros, bet billions of money against the pound, Lamont was forced to capitulate. The pound left the ERM and the label of economic competence left the Tories.
However, our exit from the ERM and subsequent lack of adoption of the European single currency, was a major reason why Britain prospered while Western Europe did not.
Germany in particular was weighed down by the cost of integrating the former East Germany, while all of Western Europe suffocated under unionised labour laws. With fixed exchange rates, their exports were expensive and could not compete with the emerging economies in the East. Whereas, decoupled, the British economy surged ahead. London consolidated its position as the largest financial centre in the World.
Whatever "success" Brown enjoyed as Chancellor, was due to two decisions he took before he even took office.
First, was his decision that he would grant independence to the Bank of England. This allowed the Monetary Policy Committee of the Bank to set interest rates, and meant that the all-important monetary policy instrument was left free of political interference.
Second, Tony Blair and Gordon Brown pledged to keep to Tory spending plans during their first Parliament, and this meant that public spending was kept under control. Later, Tony Blair regretted how little ambition his government showed in its first term in office. However, from the point of view of the economy, it meant that public expenditure was maintained at approximately 37% of GDP, rather than growing more quickly to the 42% that it is today.
However, above all, the main reason why Britain enjoyed a decade of economic prosperity during the (coincidental) time of Brown's Chancellorship was that the entire global economy was growing at a hitherto unparalleled rate due to a number of global macro factors.
The key reasons for the world's success were as follows: (1) The end of the cold war allowed the world to focus on economic growth rather than political and military fighting; (2) Emerging economies like China and India became economically liberalised and supplied labour to the world at exceptional low cost which all but eradicated inflation... (3) ...which meant that interest rates could be kept to an all-time low... which meant the price of finance and risk-taking was also at a historic low; (4) The emerging economies' trade surpluses were made available to us in the West and gave us the capital we wanted to acquire assets; (5) Advances in technology caused huge increases in efficiency, reducing transportation costs and facilitating instantaneous and free communication.
Brown never made any mention of these factors in his valedictory speeches. Instead, he droned on about tax credits and tinkered constantly with our tax system to the point where none of us could understand it.
In short, Brown claimed credit for prosperity that the whole world enjoyed. His boat simply rose with the world's tide. Ironic, then, that his reputation is now about to sink without trace.