A new chancellor and a new chance
By Martin Wolf
Published: June 28 2007 19:15 | Last updated: June 28 2007 19:15
Farewell then to prime minister Tony Blair, the dominant British political figure of the past decade and among the most talented politicians of my lifetime. Farewell also to Gordon Brown, longest serving chancellor of the Exchequer since the 19th century. The UK has a new chancellor, in Alistair Darling. This is an opportunity. I do not expect it to be taken. But it should be.
The opportunity is to undo mistakes. It will take some courage to take on the prime minister. But Mr Brown has shown it can be done. Mr Darling should dare to do as Mr Brown did while chancellor, not as he now says as prime minister. The new chancellor should also use a few of the ideas advanced by his shadow, George Osborne, in a thoughtful recent speech to the think-tank, Reform. That cannot be unthinkable. It is shrewd politics.
This is not to suggest that Mr Brown has been a poor chancellor. Evidently, he has not been. While the stability of the economy is not his achievement alone, he has done much to cement it, above all by giving the Bank of England operational independence. Fiscal policy, while not as disciplined as one might like in recent years, has also been quite tolerable. But even Mr Brown has not been perfect. So what should the new chancellor do? Here are some ideas.
First, he should give us back the Treasury we need. The prime minister will want it cut back to size anyway. So make sure its primary role is once again that of evaluating government spending, ensuring greater value for money and, above all, saying “no”, loudly and often.
Second, he should give us first-rate, independent statistics. People I trust are increasingly worried about the state of UK statistics. Without reliable information, particularly at a time of economic transformation, nobody knows what is going on – not business, not the Bank of England and not the Treasury. This will need more money and more independence.
Third, he should fix a few flaws in the broadly successful monetary policy committee. Terms should be longer than three years, while renewal should be ruled out. Appointments should be publicly advertised and independently assessed. The chancellor should still make the final decision, but the Bank’s governor should be closely consulted.
Fourth, he should re-examine the fiscal framework. The idea of balancing the current budget over a lengthy and arbitrarily measured cycle is not a good one. It would be better to target a cyclically adjusted balance in the current budget, a year or two hence, assessed annually by an independent body. Sometimes the government will need to deviate from this objective. It should be explicit about it when it does.
Fifth, he should reconsider the rules on debt. Despite being solvent, the government could not undertake good projects if it pushed the ratio of net public debt to gross domestic product above 40 per cent. The UK is close to that limit. The Treasury should set up an independent office of project evaluation and borrow to fund projects with sufficiently high social returns. It should not use the private finance initiative to get round arbitrary ceilings on its debt. The PFI is to be used only where it adds value to public procurement, while the obligations should be included as part of public debt.
Sixth, he should simplify the tax system. Mr Brown thought he could induce people to do what he wanted. He has, instead, created loopholes through which the well-advised rich have ridden coaches and horses. The priorities are: taxing income and large capital gains at the same rate, as was introduced by the Conservative Nigel Lawson over two decades ago; and reforming corporation tax, to eliminate the bias in favour of debt over equity. While simplifying tax, he should also take a close look at green taxation. Simple taxes that apply across-the-board are what is needed. The grant of valuable rights to big polluters through systems known as “cap-and-trade” is a scandal.
Seventh, he needs to remove tax credits from the tax system and return them to the department of work and pensions. Pretending that credits are negative taxes, to be assessed in the same way as taxes, has created horrifying administrative problems, which are wasteful for the government and damaging to some of the country’s poorest households.
Finally, he should engage in two important issues where Treasury involvement is inescapable: housing; and finance of higher education. On the former, further efforts need to be made not only to release land for building but to build upon it. Land taxation is a valuable tool to achieve this aim. On higher education, serious thought needs to be given to how to go about raising the £3,000 limit on tuition fees, due to be re-assessed in 2009. This never was enough to save under-financed universities.
Mr Darling must not allow himself to be merely a cipher of the prime minister. While the tension of recent years has been bad, so is a chancellor who bows to the prime minister’s whim. Mr Brown has been a dominant chancellor. But he is now doing another job. Now is the right time to review, reconsider and reform. The prime minister will have to blame what he dislikes on his turbulent chancellor. He knows all about that.