Brown’s
incompetences
The accepted wisdom is that Gordon
Brown was an extraordinarily competent Chancellor of the Exchequer, perhaps the
greatest of all time. And, for many
commentators, the puzzle is how he has become such an incompetent Prime
Minister and come to exceed his predecessor in unpopularity, if opinion polls
are to be believed.
But the real puzzle is: how did he
did obtain his reputation for competence in the first place, when he made so
many enormous policy blunders as Chancellor.
Here are a few examples:-
(I) The
Private Finance Initiative.
Gordon Brown was responsible for
forcing public bodies to use the Private Finance Initiative (PFI) for the
provision of public facilities and services.
He did so, even though PFI costs more than the traditional mode of procurement
and, as a consequence, he has wasted a load of taxpayers’ money.
And there
isn’t the slightest doubt that he was fully aware from the outset that the use
of PFI would waste taxpayers’ money – although he may have many flaws, economic
illiteracy isn’t one of them.
Using PFI rather that the
traditional means of public procurement wastes taxpayers’ money in two ways:
(1)
It involves public bodies borrowing money at a higher rate
of interest than through the usual means of public borrowing. In other words, it’s like opting for a 7%
mortgage when you are buying a house, even though you can get a 6% mortgage.
(2)
It normally involves public bodies entering into long term
contracts for services, the need for which may change dramatically or disappear
altogether well before the contract term is over. For example, the pupil numbers in a school
may decline or it may close altogether, but the annual contract charge may
still have to be paid.
A prime example of the latter has
come to light in
*
* * * *
Today, thanks to Gordon Brown,
public bodies are committed to paying a total of £170 billion to contractors in
more than 800 PFI schemes up to 2031-2032.
This figure was recently extracted from the Treasury by Conservative MP,
Richard Bacon, who is on the Public Accounts Committee (see the Committee’s
report on PFI published on 27 November 2007 [2],
Ev 13-15). And, of course, this figure
is growing all the time as more and more PFI contracts are entered into.
Of course, the
Government is fully aware that long term contracts for the supply of public
services are unwise. You have only to
look on the website of the Department of Children, Schools & Families to
confirm this. There you will find a Purchasing Guide for Schools containing
the following excellent advice in a section entitled Contracts longer than three years:
“Anything
that is longer than three years may result in inflexibility, particularly if
the agreement does not allow the school to vary its requirements in the light
of changing circumstances.” [3]
This is written by the
same Government that forces public bodies across the land to take out contracts
for 25 years and more for services that may never be required.
*
* * * *
Why was the supposedly
prudent Chancellor, Gordon Brown, addicted to PFI as a mechanism for financing
public projects? Answer: because PFI
debt is not usually treated as public borrowing for accounting purposes and
therefore doesn’t contribute to the Public Sector Borrowing Requirement
(PSBR). In other words, PFI debt is
usually “off balance sheet”, even though the state is ultimately responsible
for repaying it.
So, by using PFI, total
public borrowing is officially less than it would have been had Gordon Brown
gone down the cheaper route of conventional borrowing. This made it easier for him to meet his
self-imposed (and arbitrary) “sustainable investment” rule that total public
borrowing shouldn’t exceed 40% of gross domestic product (GDP). In other words, in order to make himself look
prudent with regard to the total volume of public debt, the Chancellor insisted
on the imprudent use of PFI borrowing, which costs the taxpayer more than
conventional borrowing.
In recent years,
Conservatives have finally got around to questioning the fact that PFI debt is
“off balance sheet”. On 30 March 2006,
Conservative MP, Brian Binley, raised the matter in the House of Commons with
Des Browne, then Chief Secretary of the Treasury. He posed the question: what would be the
consequences of moving PFI debt on to the Government’s books, to which Browne
replied that
“such
movement on to the balance sheet would put the country in a position in which
it could not meet the sustainable investment rule and thus could not invest
further in public services and our infrastructure” [4].
There you have it in a
nutshell: PFI is used to keep on balance sheet debt down, so that the
Chancellor could meet his “sustainable investment” rule.
To summarise: as Chancellor, Gordon
Brown insisted on the use of more expensive borrowing, coupled with long term
contracts for services that may never be required, in order to make himself
look prudent. You couldn’t make it up.
(II) Tax credits
Gordon Brown is the author of the extremely
complicated tax credit system, which has caused tremendous problems to claimants
since its introduction in April 2003.
Five years later, it is still giving trouble. The latest Public Accounts Committee Report
on the tax credit system [5],
which was published on 3 May 2007, makes interesting reading.
The tax credit system was designed
to provide financial assistance to families with children and workers on low
wages. Families receive an annual award
depending on their total income in a tax year and on their family
circumstances, but it is paid in weekly amounts throughout the tax year. Claimants are required to report changes in
income and family circumstance to HM Revenue & Customs (HMRC) and their
payments are adjusted to reflect these, but it is only at the end of the tax
year, when total income is known, that the correct annual award can be
calculated and final adjustments made.
This kind of system with an annual award based on circumstances which
change frequently inevitably results in overpayments, because incomes tend to
increase. Inevitably also, clawing back
these overpayments causes pain to low paid workers.
It is doubtful if this form of
income supplement is suitable for low paid workers, whose income tends to vary
considerably, requiring reporting to the paying authority and consequent
payment adjustment. Family Credit, the
form of income supplement it replaced, was fixed for a period of 26 weeks and
the weekly payment was based on earnings in the 7 weeks prior to the
period. Like the payments of benefits,
which are normally fixed for a year, this required very little interaction
between the recipient and the paying authority once the claim was accepted –
and the claimant knew what s/he was going to get by way of income supplement
over the next 26 weeks.
By contrast, in Gordon Brown’s tax
credit system, many claimants are at a loss to know what they should be
getting. Administrative errors by HMRC
abounded initially, in part because of an IT system that was a shambles at the
outset and two and a half years later still had 199 known software errors in it
(see [5],
paragraph 35). At one point, due to
software errors, the IT system miscalculated awards and generated
overpayments. Claimants receiving
overpayment notices didn’t know whether to believe them or not, and it was
impossible to co. Tens of thousands
suffered hardship because of attempts to claw them back.
HMRC paid out some £47 billion in
the first three years of the operation of the tax credit system. Overpayments totalled about £5.8 billion in
this period. Much of this will have to
be written off.
Gordon Brown is responsible for this
mess. Ministers have resigned for much,
much less.
(III) Selling off the Treasury estate
A third example of Gordon Brown’s
incompetence was the selling off of most of the Treasury estate to a private
company based in a tax haven in a deal called STEPS (the Strategic Transfer of
the Estate to the Private Sector). See,
for example, the Public Accounts Committee Report on STEPS published on 14 June
2005 [6].
In April 2001, HM Customs &
Excise and the Inland Revenue (since merged as HM Revenue & Customs) transferred
the ownership and management of most of their estates – 574 buildings in all –
to Mapeley, a private sector consortium in a 20-year PFI deal. Mapeley paid £220 million for the
estate and will pay a further £150 million over the first ten years of the
contract, through reductions in the annual charge (of £170 million) paid by Customs & Excise and
the Inland Revenue to rent back the buildings.
In other words, the Treasury received on average about £400,000 up front
per office building, which would barely buy a house today.
HMRC may cease renting a building at
any time, and then Mapeley is free to do what it likes with it.
After the deal was signed, it
emerged that most of the property was actually going to be transferred to a subsidiary
company – Mapeley STEPS Ltd – based in a tax haven (
Seven months into the deal, Mapeley
told the Departments it faced a serious cash flow problem and asked for
additional money.
(IV) NATS part-privatisation
A fourth example of Gordon Brown’s
incompetence was the part-privatisation of the National Air Traffic Service
(NATS) in July 2001, in which he gave a controlling interest in NATS to a group
of airlines for a mere £50 million, about a tenth of what it was worth. See, for example, the National Audit Office
report published on 24 July 2002 [7].
Before the 1997 General Election, Labour
frontbench MP, Andrew Smith, famously told a Labour Party conference that “our
air is not for sale”. He was pledging
that the Labour Party would resist Conservative plans to privatise NATS. However, Gordon Brown dropped this pledge in
the run up to the election, because he wanted to follow existing Conservative
plans to raise around £800 million by this means.
NATS is inherently unsuitable to be
even partially sold off, because it’s a natural monopoly – there’s only one lot
of air above
But Brown insisted that the Treasury
got most of the £800 million it set out to get.
The Government ended up getting £758m as a result of the transaction,
but the bulk of that came from a £733m loan taken out by NATS, which resulted
in its debt burden being more than doubled.
This is clear from the National Audit Office (NAO) report on the
transaction published on 24 July 2002:
“[After
part-privatisation] NATS’ initial financial structure saw NATS’ debt rise from
£330 million to £733 million to cover the sale proceeds paid to the
Government.” [7]
So a transformation that was
supposed to provide NATS with access to bucket loads of private finance for
investment, not to mention untold benefits from private sector management and
private sector economic disciplines, began by saddling it with an extra £403m of
debt, which pushed it to the edge of bankruptcy after 9/11 when air traffic
fell.
The total cost of the project to the
Department of Transport was around £44m (see NAO report, Table 12). Their lead advisers were the investment bank,
Credit Suisse First Boston (CSFB) which was retained in September 1998
initially for 18 months at £222,000 a month, later extended to 33 months. (Apparently, it is not their practice to
provide records to enable payment on the basis of actual time spent, so they
had to be employed on a fixed retainer, whether they had any work to do or
not). They received almost £9m in all
for advice. Legal advice cost £13.7m.
Within months, CFFB got further work
from the Government, this time to advise on the financial status of the new
NATS. It was effectively bankrupt.
Economic
management
It will be said in Brown’s defence
that, as Chancellor, his management of the British economy was second to none
and that his ceding of responsibility for the setting of interest rates to the
Monetary Policy Committee of the Bank of England was a stroke of genius (which
meant that a major aspect of economic management was out of his hands).
The reality is that, when he took
over as Chancellor from Ken Clarke, the British economy had been growing and
inflation and unemployment falling since 1992, when sterling fell out of the
European Exchange Rate Mechanism.
Furthermore, he had the good luck to serve as Chancellor in a period of
low inflation world wide, in large measure due to the availability of cheap
consumer goods from East Asia, particularly
As for his ceding responsibility for
setting interest rates to the Bank of England, it’s difficult to believe that
interest rates would have been markedly different had the pre-1997 mechanism for
setting interest rates continued. At
that time, the Treasury and the Bank of England set rates jointly.
When he gave the Bank of England
responsibility for interest rates, he took away its responsibility for bank
regulation and gave it to the Financial Services Authority (FSA), a new body
which in its 10 years of existence hasn’t developed a reputation for regulatory
zeal on behalf of consumers. And it
didn’t notice that Northern Rock’s business model of borrowing short to lend
long was an accident waiting to happen, if ever it became difficult to obtain
credit, as happened the summer of 2007.
It cannot be said that Brown’s reorganisation of the regulation of
bodies that provide financial services, including banks, has proved to be a
great success.
Overall, Brown’s claims to
competence in his 10 years as Chancellor are greatly exaggerated. That he has such a reputation is a reflection
of the ineffectiveness of the opposition parties during his
Chancellorship. An effective opposition
might have forced him out of office.
Prime Minister Brown
Since becoming Prime Minister, Brown
has at times behaved with childish incompetence. How can you take seriously a person who makes
promises that are obviously impossible to fulfil, as he did in Labour Party conference
speech? How can you take seriously a
person who says with a straight face that he called off the autumn election he
was planning, not because the opinion polls turned against him, but because he
wanted more time to lay out his “vision” to the British people?
Initially, he was given an
extraordinary easy ride by the press, as he muttered gibberish about “change”,
with the aim of convincing the world that a Brown government was going to be
different in style, and possibly substance, from a Blair government. His first statement as Prime Minister outside
Story after story was written in the
press about the “Brown bounce” (which was primarily a “not Blair bounce”). Story after story was written about the extraordinary
competence with which he handled terrorist attacks, an outbreak of foot and
mouth disease (and another of blue tongue) and summer flooding, in the first
few months of his premiership. But what
was difficult about any of it? The
terrorist attacks were amateurish; the outbreak of foot and mouth disease,
while embarrassing for the government since it originated in a government
laboratory, was limited in scope; as for the flooding, he promised more money
for flood protection, as any prime minister would do.
It was fairly clear from an early
stage that there was going to be very little actual change either in style or
substance compared with the Blair regime.
Looking back, has any Blair policy been reversed? I can’t think of one.
Electoral
retreat
Brown was riding still high in the
opinion polls when the Labour Party conference began on 23 September 2007 and
even higher when it ended, even though he gave a few hostages to fortune in his
conference speech (of which more later).
Throughout the week, his friends talked up the possibility of a general
election in late October or early November.
When the conference ended, he was planning to hold an election within
weeks, in the confident expectation that a majority of 1997 proportions was his
for the taking.
However, he reckoned without a
marketing coup by the Conservatives on inheritance tax. On the Monday of the Conservative conference
the following week, George Osborne, their Shadow Chancellor, announced that “in
a Conservative Britain, only millionaires will pay death duties” [9]. Osborne said that this, and exempting most
first time buyers from stamp duty, would be paid for by making people with
non-domiciled tax status, who pay no tax at the moment, pay a £25,000
levy. In vain, Labour tried to say that
taxing non-doms would raise nowhere near the amount required. The coup worked and triggered a slide in
Brown’s popularity, from which he has yet to recover fully.
The next day Brown made a trip to
His conference speech a few days
earlier had contained a couple of impossible promises, which David Cameron made
devastating use of in his conference speech (and later). The first was his promise to “create British
jobs for British workers” [10], which,
apart from being a BNP slogan, is impossible unless
“He told us things that
he knows he can’t do: ‘British jobs for British workers’ is illegal under EU
law. ‘Deporting people for gun and knife crime, you can’t do that because of
the Human Rights Act. I have to say to our Prime Minister, if you treat people
like fools you don’t deserve to run the country, let alone win an election.” [11]
At the end of the week on 6 October
2007, faced with opinion polls showing the Conservatives back in the lead,
Brown called off the election. Refusing
to face the electorate because he thought he would lose was bad enough, but he
made his cause much worse by denying that he had run away because the opinion
polls had turned against him. When asked
at a press conference on 8 October 2007:
“… if the News of the
World poll had put you 5 points ahead in the key marginals and you would have
got a 100 seat majority in the House of Commons, would you have still not
called an election?”
he replied:
“I would have made the
same decision, I have just told you, I have explained my decision, it is what I
wanted to do to show the British people I can deliver.” [12].
That was another instance of
treating people like fools and Cameron has made hay with that too.
David
Morrison
Labour
& Trade Union Review
20 January
2007
References
[1] www.belfasttelegraph.co.uk/news/local-national/article3251053.ece
[2] www.publications.parliament.uk/pa/cm200607/cmselect/cmpubacc/754/754.pdf
[3] www.dfes.gov.uk/valueformoney/docs/VFM_Document_15.pdf
[4] www.publications.parliament.uk/pa/cm200506/cmhansrd/vo060330/debtext/60330-03.htm
[5] www.publications.parliament.uk/pa/cm200607/cmselect/cmpubacc/487/487.pdf
[6] www.publications.parliament.uk/pa/cm200405/cmselect/cmpubacc/553/553.pdf
[7] www.nao.org.uk/publications/nao_reports/01-02/01021096es.pdf
[8] www.number-10.gov.uk/output/Page12155.asp
[9] www.georgeosborne.co.uk/shadow_news.php?id=35
[10] www.labour.org.uk/conference/brown_speech
[11] www.conservatives.com/tile.do?def=news.story.page&obj_id=139453
[12] www.number-10.gov.uk/output/Page13457.asp