LONDON BRIEFING/Chris JohnsGordon Brown is due to present his annual Pre-budget report to the House of Commons today, in which he outlines his economic forecasts and his projections of the public finances. As its name suggests, this is not the actual budget but we will be able to guess at the broad shape of forthcoming policy changes once we have heard Mr Brown speak.
Like his finance ministry counterparts around the world, the UK Chancellor of the Exchequer is faced with the questions that are always posed by lower than expected economic growth. Many commentators have actually exaggerated the difficulties faced by Mr Brown. While he faces a shortfall of taxation receipts, the deficit is not that big, nor is it much to worry about given the fiscal rules that he has set himself.
In addition, the chancellor, unlike Mr McCreevy, is in relatively good shape thanks to his reasonably tight control over public expenditure - particularly current spending - in the years since Labour first came to office in 1997. The two key decisions taken at that time were to grant independence to the Bank of England and to stick to the rather tight public expenditure plans inherited from the outgoing Tory government. There is a very real sense in which Gordon Brown's flirtation with "prudence" has been more than a passing affair.
UK government borrowing could be around £10 billion sterling (€15.68 billion) higher in fiscal 2002 and 2003 than assumed in the last budget. This is almost entirely due to lower tax receipts rather than higher or unplanned government expenditure. The self-imposed fiscal framework dictates that Mr Brown has to balance the books over a "full economic cycle".
So, when the cycle turns down, nobody should be surprised, nor should there be any panic, when borrowing rises. Remedial action - spending cuts and/or higher taxes - is explicitly not required in such circumstances. Similarly, should growth surprise on the upside, lower than expected deficits are not used to boost spending or to slash taxes, the surpluses are merely allowed to accumulate. Over a full cycle, these unanticipated movements in borrowing should broadly cancel out.
Contrast all this with the inflexibility of Europe's stability pact. Germany is raising taxes and cutting spending because of a cyclical deterioration in the economy, policies that will make the slowdown worse, which will make the deficit worse and so on. Also make the comparison with Mr McCreevy's position: the Minister for Finance is struggling with the consequences of slower growth and runaway public expenditure.
The UK's flexibility towards fiscal policy is sensible but occasionally stretches credulity. In particular, we do not know with any precision what the term "full economic cycle" means. Gordon Brown is happy to leave certain things vague, giving him some wiggle room should he need it.
It is to his credit that he has not been tempted to fully avail of this room for manoeuvre but Mr Brown is a politician ambitious to be the next prime minister. He must be torn between his affections for prudence and his desire to move into 10 Downing St.
Gordon Brown is also, in one key respect, a bit of an Old Labour type, with a fondness for centralised control over everything and an obvious desire for redistribution of other people's income. This latter attribute needs to be kept under wraps because it is the one thing that will alarm the middle classes.
The chancellor will be raising taxes this year, a measure that he pre-announced in his last budget. Actually, this is not wholly accurate.
He announced a large rise in National Insurance contributions (the equivalent of PRSI), thereby claiming to honour the letter, if not the spirit, of Labour's election promise not to raise personal income taxes. His redistribution instincts may well mean that there is more of this to come.
The bigger problem facing Mr Brown is not the sluggishness of tax receipts. The cycle will ultimately take care of that. Rather, it is the promise to deliver vastly improved public services. The money is there and it is starting to be spent. But the ultimate destination of that cash - higher public sector wages or improved services - will be determined in large part by the outcome of the fire brigade strike.
In many ways, the success or failure of New Labour now rests on how a very old-fashioned labour dispute evolves from here. If the government capitulates, Mr Brown knows that all of his past prudence will be for naught.
Chris Johns is chief strategist with ABN AMRO Securities, London. All opinions expressed are entirely personal.
