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Monday, 6 May, 2002, 08:37 GMT 09:37 UK
Brown's steady hand
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By Steve Schifferes
BBC News Online economics reporter

After five years in power, Labour's economic strategy has delivered steady growth and low inflation.

Moreover, the policy framework put in place by Labour - including an independent Bank of England and new rules on government spending - have been widely praised, and have now been broadly accepted by the Opposition.

Labour has also stabilised the public finances, having inherited a huge budget deficit.

Now the chancellor faces a new challenge of raising the money needed for the modernisation of the NHS and other key public services.

And a decision over the UK's membership of the euro is promised by the middle of next year.

Despite reforms, British companies are still lagging behind their European and US counterparts in the battle for higher productivity.

The improvement in the UK's economic performance - which began under the Conservatives - has given Labour a once unthought of reputation as the party of economic competence, and helped make Gordon Brown the most popular minister after the Prime Minister.

However, as the graphs in this article demonstrate, the UK's economic improvement began while Kenneth Clarke was still chancellor.

Bank independence

Gordon Brown's first act on becoming chancellor was probably his most significant.

Within days of taking power, he gave the Bank of England independence to set interest rates through a nine-person Monetary Policy Committee (MPC).

The MPC has generally won praise from economists for its rapid response to changing economic conditions, and cuts in interest rates helped moderate the consequences for Britain of the world financial crisis in 1998 and the severe recession in the US in 2001.

In fact, in 2001, the UK was the fastest-growing of any of the world's major economies, while inflation remained subdued and unemployment continued to fall.

Shadow chancellor Michael Howard backs the creation of an independent MPC, saying "we have a framework now which I say is working pretty well.. in monetary policy at least, there is now a very considerable degree of economic consensus."

Gordon Brown still retains a strong degree of influence on the MPC, appointing half its members for relatively short three-year terms.

And the chancellor also sets the inflation target - currently 2.5% - which is "symmetrical".

That means the Bank is obliged to lower interest rates if inflation is too low as well as raise them if it is high, helping to keep growth strong.

However, as the fifth annoversary arrived, many economists believe that the chancellor is being optimistic in his estimates of future growth, and he has revised the long-run growth estimate for the UK economy by 0.25% to 2.5%.

Prudence with a purpose?

The move will help the government bridge the financing gap between spending and tax collections now that the chancellor has decided to loosen the purse-strings.

In his first three years in office, Gordon Brown enforced a severe squeeze on public spending - sticking with the Conservatives' spending plans - and in doing so during economic boom times, he eliminated the budget deficit.

But the cost was a further deterioration in public services, which the chancellor wants to put right with a 40bn increase in health spending over the next 5 years.

Mr Brown has announced an 8bn tax increase for next year - adding 1% to National Insurance payments to both employers and employees to fund the rise.

Nevertheless, the budget deficit is set to rise to 1.4% of GDP, or 17bn, by 2005-06 - although under the chancellor's rules spending for investment, around 10bn, can be disregarded.

However, Labour has consistently underspent public money earmarked for investment, and could be vulnerable if tax increases do not result in measurable improvements in public services.

Euro debate

The rising budget deficit is one of the main reasons the chancellor appears to have grown more eurosceptic.

If the UK adopted the euro, then Britain would have to aim to balance its budget and ensure that it never borrowed more than 3% of GDP.

The European Commission has already criticised the UK government for its rising deficit.

Mr Brown has pledged to tell Parliament by the middle of next year whether the UK meets the five tests he has set for recommending euro-membership to the public - who would then have the chance to vote in a referendum.

Many economists believe that the UK already meets the main test - that its economy is broadly convergent with the rest of the EU, with interest rates, inflation and growth broadly similar.

But Mr Brown appears reluctant to hand over the main job of economic management to the European Central Bank, after the success of the independent Bank of England.

Given the chancellor's tight grip on economic policy, this could be the biggest source of tension with the prime minister, who is notably warmer towards the single currency.

Strains with business

The big tax increase has taken its toll on Labour's relations with business, which both Mr Blair and Mr Brown had been carefully cultivating.

Corporate leaders have been upset over the lack of consultation over the tax increases, and they complain that under Labour the burden of regulation has risen - partly because Labour has adopted some European social legislation.

With Labour still riding high in the opinion polls, big business is not about to abandon its dialogue with the government - and the chancellor will continue with his raft of measures to boost training, research, and investment.

However, in the long run, the biggest challenge for industry is to boost its productivity - the output that each worker produces - where the UK lags behind the US, Germany, and France in order to raise the UK's standard of living.

For Mr Brown, the challenge will be to keep his business supporters happy and his reputation for prudence intact, while presiding over the biggest increase in public spending for decades.

See also:

25 Apr 02 | Business
Gordon's next challenge
11 Mar 02 | UK Politics
Howard hails Brown's bank move
26 Apr 02 | Business
UK economy edges forward
17 Apr 02 | Business
UK unemployment falls
17 Apr 02 | Business
Evan Davis: Budget view
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