James Blitz: Making a virtue out of failing growth

Gordon Brown came to the Commons to deliver his pre-Budget report knowing he would have to concede that he had got his economic growth forecasts totally wrong.

But while the chancellor swiftly acknowledged that growth would come in at half the rate he predicted in March, he embellished this fact with an argument that almost seemed to make a virtue out of the current economic slowdown.

For the Conservatives, who will on Tuesday start a new regime under leader David Cameron, this was a golden opportunity. As they prepare for the Cameron versus Brown election contest that seems certain to come four years from now, this was a chance to prove Labour’s colossus had feet of clay.

George Osborne, the shadow chancellor, declared that Mr Brown had been forced into the humiliation of admitting that he had “got it all wrong”.

But the iron chancellor does not believe he has been dented. Instead, he insisted that while his economic growth forecast was down, the economy’s underlying position was still good, with employment at its highest levels and inflation fully under control.

He went on to suggest that the short-term economic problems should bear witness to his success, arguing that the country would reward him for steering the economy through difficult moments as well as the good.

“As chancellor I have always understood,” he told MPs, “that the strength of a monetary and fiscal regime is how it performs, not just in the good years but in this, the toughest and most challenging year for the economy.”

Politically there is one factor that underpins the chancellor’s sense of confidence. At this moment in the parliamentary cycle, just six months after an election, Labour can afford a rough patch.

Come 2009, when the next election is expected, few people will blame him for the fact that he got growth forecasts wrong in 2005. Instead, argue his allies, what should worry the Conservatives is that when that election comes, Mr Brown expects that economic growth and the public finances will look much better.

Mr Brown always begins the period after an election sounding a grim note. In 1997 he moved to tighten the grip on public finances, to prove Labour would be a firm steward of the public finances. In 2001, he raised tax to pay for investments in the NHS. This time, too, his first post election statement was tough: a tax-raising PBR, which tightens the public finances.

The £2bn-a-year tax on North Sea oil companies was the centrepiece. Inevitably, it triggered outrage from the North Sea oil industry. In order to mollify his critics, Mr Brown pledged not to raise tax on them any more before the next election. But the Treasury was always going to think this an easy political hit, given how little fallout there was last March, when he hit them for £1bn in the Budget.

In turn, Mr Brown used that cash to pay for three areas that underpin his political goals. There was money for pensioners through the the winter fuel allowance, a freezing of road fuel duty, and money to ease the tax credit system.

Mr Brown’s critics would argue that this was a PBR that, for all his high-flown rhetoric, was merely an exercise in patching up many of the problems he faces.

On tax credits, for example, the chancellor has been forced to acknowledge the mess the system is in. By raising the income disregard on tax credits to a remarkable £25,000, he has written off hundreds of millions of pounds of Treasury cash.

The increase in the winter fuel allowance will be seen by some critics as being evidence of his short-termist approach to the pension system. Lord Turner, who led the government’s Pensions Commission has argued that pensioners need a more generous basic state pension, not regular top-ups of a system that relies on means testing.

However, Mr Brown would argue that as far as political outlook was concerned, he had set the terms of the political debate for this parliament in three ways. First, he believes he has en-trenched his reputation for economic competence by shoring up the public finances. In his view, Michael Howard’s recent concession that Labour will never lose power unless the economy goes seriously downhill is critical.

Second, the chancellor believes the PBR shows how Labour is rising to the challenges of globalisation by boosting areas such as skills and science. Mr Brown thinks the role of government is important in these areas while the Conservatives believe there is too much intervention.

Finally, there is the size of the state. The Conservatives’ central argument is that Mr Brown has overspent. “But as long as the economy is run in a stable way, there will be an appetite for public investment,” says a Treasury official.

Hence Mr Brown’s attack on Mr Cameron’s mantra that the Tories should share the proceeds of growth between tax cuts and public investment. Mr Brown believes such a commitment puts public spending as a proportion of gross domestic product on a downward track. But that, in Mr Brown’s view, is not what the public will want come the next election.