Gordon Brown is repeatedly attacking the Tories as the “do nothing” party. The opposition is undoubtedly vulnerable to Brown’s jibe because he is portraying himself as the “do something” leader. On the face of it, surely “doing something” is better than “doing nothing”? However, I believe Cameron is showing signs of developing a strategy to neutralise Brown’s attacks. Cameron is saying that Brown’s “do something” is effectively a costly dud; it will not work, will only lead to higher, unnecessary taxes and all because Brown knows that he has to be seen to be “doing something” otherwise he is finished politically, even if his “something” is an expensive waste of time, a “fig leaf” in the words of Vince Cable.
So why has Brown adopted this strategy?
1) DIVIDING LINES - For Gordon Brown, politics is about dividing lines; it is how he operates. His most famous and successful dividing line used at consecutive general elections against the Conservatives was “Labour investment vs. Tory cuts.” The Prime Minister now wants the electorate to embrace his new dividing lines: “Labour action, strength and fairness vs. Tory inaction, dithering, and unfairness.” Brown believes this strategy will secure him victory at the next general election. For this is to work, he will need to call an election in 2009 rather than hang on until 2010. The PBR had all the hallmarks of an old-style pre-election giveaway Budget with: more money for pensioners; VAT tax cut in a pre-Christmas giveaway; softening the potential impact of planned changes to vehicle excise; and making permanent the pay-out for a majority of those who lost out from the abolition of the 10p tax rate (though still ignoring a million people who have yet to be ‘compensated’). In a year’s time Darling is unlikely to have any money left to hand out pre-election bribes. This will especially be the case if his (optimistic) growth forecasts need to be downgraded yet again as seems likely. Whether Brown can call an election in 2009 in the midst of a recession and after all his election shenanigans for party political advantage a year ago is a moot point. John Rentoul reckons Brown has made calling a 2009 election harder on Sunday's BBC1 Politics Show, when he ad libbed: "I am not planning it at all; I do not think people would think much of me." We shall see…
2) FEAR OF IMPOTENCE FROM A BIG STATE POLITICIAN - Another reason why Brown has adopted a “do something” strategy is that he is an instinctive big State politician who thinks that the State always offers the best solution. He will have felt compelled to act because of this and also because he would not have wanted to admit his own impotence. Brown could have prepared Britain better for an economic downturn. Over the last 11 years he could have taken steps to prevent Britain having the world’s biggest housing boom. Remember in his 1997 Budget Statement he promised: "I will not allow house prices to get out of control and put at risk the sustainability of the recovery." He could have taken steps to ensure that Britain did not have the highest levels of personal debt in the world. And he could have taken steps to balance the economy so that it was not overly dependent on housing, finance and government spending. But Brown chose to do none of these things and instead chose to preside over an unsustainable boom with the largest budget deficit in the developed world. As a result of not “fixing the roof when the sun was shining,” he has been forced to abandon his fiscal rules – the bedrock of his economic policy – and borrow vast sums of money, leading to a doubling of the national debt to over £1 trillion in just five years time. Faced with a large budget deficit and no money Brown is unwilling to admit he is impotent to act even though he admitted back in 1997 as Chancellor that: “We have learned from past mistakes... you cannot spend your way out of a recession.” But that was then and this is now. Now, Brown is Prime Minister and fighting for his political life. He is returning to type as the instinctive big State politician, believing that if he “does nothing,” admits he did not prepare for a downturn and as a consequence is impotent in the face of the recession, he will be duly punished by the electorate
3) HE ACTUALLY BELIEVES IT WILL WORK - A further reason – and the least cynical - why Brown has adopted his “do something” approach is that he genuinely believes his fiscal stimulus will work. It will not come as a surprise that I do not agree. I think the centrepiece of his stimulus – the cut in VAT – will not work as I cannot see how it will have a great effect on behaviour, or any effect, to that matter. Why will a 2.5 percent cut make any difference when shops are already offering substantial discounts of 20 percent or more? Furthermore, only about half of the 2.5 percent cut translates into an actual cut in consumer prices, according to economists, and this is even dependent on retailers passing on the cuts rather than pocketing themselves. I understand why the government chose VAT for a cut because it is immediate and is designed to encourage spending because to make savings you have to spend money as VAT is a tax on spending but I strongly believe, for the reasons outlined above, it will have only a marginal effect at best and definitely not worth the £12 billion the government is borrowing to pay for its temporary tax giveaway. Brown would have been better off raising the tax free allowance of income tax for low income workers or cutting the basic rate of income tax. This would benefit low income and middle income workers most and these are the type of people who are feeling the pinch and are unlikely to save their tax cut as they do not have that luxury. Brown has made a costly mistake which although passes the “do something” test, fails the “do something worthwhile” test.
The Conservatives criticise Brown’s fiscal stimulus because they argue, quoting the IMF, that Britain, with such a large budget deficit, should not be going down this route, as a stimulus package is only for those with surpluses or relatively small deficits. The Tories thus argue the government is being irresponsible – both in not building a surplus in the good years and for borrowing even more money to fund a fiscal stimulus now in the bad years. They also argue that economic history proves that governments cannot spend their way out of recession. It failed in the 1930s when FDR tried it in the United States (only working with a shift to a war economy) and it failed during the 1990s when Japan tried it during their “Lost Decade.” The Conservatives also argue that tax cuts should be funded (paid for by cuts in spending and thus responsible) and they should be permanent. Brown’s fiscal stimulus essentially lasts only 13 months and then comes to end followed by permanent tax increases which is the last thing the economy will need when it is trying to recover.
That is the critique from the Right, but one can also criticise Brown’s fiscal stimulus from the Left. Brown’s stimulus basically amounts to 1 percent of GDP, which is what the IFS said would be the bare minimum. The IMF has called for a stimulus of 2 percent of GDP which in Britain’s case would equate to about £30 billion. Moreover, in the United States, President-Elect Obama’s advisers have been talking about a stimulus in the region of 3.5 to 5 percent of US GDP. The critique from the Left is therefore that never mind whether Brown has chosen the right way to transmit his stimulus to the failing British economy, the real problem with Brown’s stimulus is that it simply is not large enough to do any good anyway. If this US stimulus comes to pass it will be a bold move by the new President because America’s budget deficit and public debt are also at similar levels, proportionally, to Britain’s. When one looks at the measures Brown has announced from the perspective of the Left, he has been far too cautious – and fudged his stimulus. Not large enough to do any good, but large enough to claim he is “doing something.” Gerard Baker in the Times (25 November) has given an explanation for why Brown has chosen not to “go for broke” like Obama. He wrote: “The answer is that Britain is much more vulnerable to further meltdown in the financial system. As bad as it is, the total size of the contingent liabilities of the US banking system is probably no more than 30 percent of US GDP. In Britain the number is probably between 200 and 300 percent. If a large chunk of that eventually has to be met by the Government, the scale of the fiscal crisis would be awful in America but literally catastrophic in Britain.” I would add another answer. Brown does not like being branded “irresponsible” by the Tories and accused of putting economic stability at risk. Had he gone for a fiscal stimulus of 2 percent of GDP or more he would have opened himself up further to the “irresponsible” charge and a larger “tax bombshell” to follow. In the consequences, Brown compromised and took the middle road between “doing nothing” and “doing something worthwhile” leaving him with the worst option of “doing something costly and ineffective.”
So why has Brown adopted this strategy?
1) DIVIDING LINES - For Gordon Brown, politics is about dividing lines; it is how he operates. His most famous and successful dividing line used at consecutive general elections against the Conservatives was “Labour investment vs. Tory cuts.” The Prime Minister now wants the electorate to embrace his new dividing lines: “Labour action, strength and fairness vs. Tory inaction, dithering, and unfairness.” Brown believes this strategy will secure him victory at the next general election. For this is to work, he will need to call an election in 2009 rather than hang on until 2010. The PBR had all the hallmarks of an old-style pre-election giveaway Budget with: more money for pensioners; VAT tax cut in a pre-Christmas giveaway; softening the potential impact of planned changes to vehicle excise; and making permanent the pay-out for a majority of those who lost out from the abolition of the 10p tax rate (though still ignoring a million people who have yet to be ‘compensated’). In a year’s time Darling is unlikely to have any money left to hand out pre-election bribes. This will especially be the case if his (optimistic) growth forecasts need to be downgraded yet again as seems likely. Whether Brown can call an election in 2009 in the midst of a recession and after all his election shenanigans for party political advantage a year ago is a moot point. John Rentoul reckons Brown has made calling a 2009 election harder on Sunday's BBC1 Politics Show, when he ad libbed: "I am not planning it at all; I do not think people would think much of me." We shall see…
2) FEAR OF IMPOTENCE FROM A BIG STATE POLITICIAN - Another reason why Brown has adopted a “do something” strategy is that he is an instinctive big State politician who thinks that the State always offers the best solution. He will have felt compelled to act because of this and also because he would not have wanted to admit his own impotence. Brown could have prepared Britain better for an economic downturn. Over the last 11 years he could have taken steps to prevent Britain having the world’s biggest housing boom. Remember in his 1997 Budget Statement he promised: "I will not allow house prices to get out of control and put at risk the sustainability of the recovery." He could have taken steps to ensure that Britain did not have the highest levels of personal debt in the world. And he could have taken steps to balance the economy so that it was not overly dependent on housing, finance and government spending. But Brown chose to do none of these things and instead chose to preside over an unsustainable boom with the largest budget deficit in the developed world. As a result of not “fixing the roof when the sun was shining,” he has been forced to abandon his fiscal rules – the bedrock of his economic policy – and borrow vast sums of money, leading to a doubling of the national debt to over £1 trillion in just five years time. Faced with a large budget deficit and no money Brown is unwilling to admit he is impotent to act even though he admitted back in 1997 as Chancellor that: “We have learned from past mistakes... you cannot spend your way out of a recession.” But that was then and this is now. Now, Brown is Prime Minister and fighting for his political life. He is returning to type as the instinctive big State politician, believing that if he “does nothing,” admits he did not prepare for a downturn and as a consequence is impotent in the face of the recession, he will be duly punished by the electorate
3) HE ACTUALLY BELIEVES IT WILL WORK - A further reason – and the least cynical - why Brown has adopted his “do something” approach is that he genuinely believes his fiscal stimulus will work. It will not come as a surprise that I do not agree. I think the centrepiece of his stimulus – the cut in VAT – will not work as I cannot see how it will have a great effect on behaviour, or any effect, to that matter. Why will a 2.5 percent cut make any difference when shops are already offering substantial discounts of 20 percent or more? Furthermore, only about half of the 2.5 percent cut translates into an actual cut in consumer prices, according to economists, and this is even dependent on retailers passing on the cuts rather than pocketing themselves. I understand why the government chose VAT for a cut because it is immediate and is designed to encourage spending because to make savings you have to spend money as VAT is a tax on spending but I strongly believe, for the reasons outlined above, it will have only a marginal effect at best and definitely not worth the £12 billion the government is borrowing to pay for its temporary tax giveaway. Brown would have been better off raising the tax free allowance of income tax for low income workers or cutting the basic rate of income tax. This would benefit low income and middle income workers most and these are the type of people who are feeling the pinch and are unlikely to save their tax cut as they do not have that luxury. Brown has made a costly mistake which although passes the “do something” test, fails the “do something worthwhile” test.
The Conservatives criticise Brown’s fiscal stimulus because they argue, quoting the IMF, that Britain, with such a large budget deficit, should not be going down this route, as a stimulus package is only for those with surpluses or relatively small deficits. The Tories thus argue the government is being irresponsible – both in not building a surplus in the good years and for borrowing even more money to fund a fiscal stimulus now in the bad years. They also argue that economic history proves that governments cannot spend their way out of recession. It failed in the 1930s when FDR tried it in the United States (only working with a shift to a war economy) and it failed during the 1990s when Japan tried it during their “Lost Decade.” The Conservatives also argue that tax cuts should be funded (paid for by cuts in spending and thus responsible) and they should be permanent. Brown’s fiscal stimulus essentially lasts only 13 months and then comes to end followed by permanent tax increases which is the last thing the economy will need when it is trying to recover.
That is the critique from the Right, but one can also criticise Brown’s fiscal stimulus from the Left. Brown’s stimulus basically amounts to 1 percent of GDP, which is what the IFS said would be the bare minimum. The IMF has called for a stimulus of 2 percent of GDP which in Britain’s case would equate to about £30 billion. Moreover, in the United States, President-Elect Obama’s advisers have been talking about a stimulus in the region of 3.5 to 5 percent of US GDP. The critique from the Left is therefore that never mind whether Brown has chosen the right way to transmit his stimulus to the failing British economy, the real problem with Brown’s stimulus is that it simply is not large enough to do any good anyway. If this US stimulus comes to pass it will be a bold move by the new President because America’s budget deficit and public debt are also at similar levels, proportionally, to Britain’s. When one looks at the measures Brown has announced from the perspective of the Left, he has been far too cautious – and fudged his stimulus. Not large enough to do any good, but large enough to claim he is “doing something.” Gerard Baker in the Times (25 November) has given an explanation for why Brown has chosen not to “go for broke” like Obama. He wrote: “The answer is that Britain is much more vulnerable to further meltdown in the financial system. As bad as it is, the total size of the contingent liabilities of the US banking system is probably no more than 30 percent of US GDP. In Britain the number is probably between 200 and 300 percent. If a large chunk of that eventually has to be met by the Government, the scale of the fiscal crisis would be awful in America but literally catastrophic in Britain.” I would add another answer. Brown does not like being branded “irresponsible” by the Tories and accused of putting economic stability at risk. Had he gone for a fiscal stimulus of 2 percent of GDP or more he would have opened himself up further to the “irresponsible” charge and a larger “tax bombshell” to follow. In the consequences, Brown compromised and took the middle road between “doing nothing” and “doing something worthwhile” leaving him with the worst option of “doing something costly and ineffective.”
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