Black days for Brown, a green light for the euro?

The Chancellor has hit a rocky patch – the economy is unwell, shares are down and taxes are up. And his next-door neighbour isn’t helping either, says George Pitcher

It’s said that the only conceivable reason why Gordon Brown would want to be Prime Minister is that he doesn’t want to be Chancellor anymore. And who can blame him?

Despite his reputation for prudence in the late Nineties, last year was UK manufacturing industry’s worst since 1991. It contracted by four per cent. Engineering output fell by a tenth.

These figures may well have been a contributing factor to the Bank of England’s surprise quarter-point cut in interest rates last week – a cut widely perceived as rather panicky or, in any event, far from prudent. It was, of course, Brown’s initiative – in the high summer of the New Labour revolution in 1997 – to create an independent Bank of England that decides interest rates without government interference.

That interest-rate cut may go some way to mitigating a collapse in the residential property market. This is important not so much to protect over-stretched metropolitan types from potentially ruinous negative-equity traps, but for its knock-on effect to the consumer economy.

Homeowners struggling to meet mortgage commitments on houses that are not rising in value are unlikely to be out spending in the shops.

But the property market is a fickle and easily manipulated one. Just one symptom of this is the way in which figures from the Land Registry were variously interpreted in the press this week. The Times reported that “the property boom is over and house prices are falling”. The Financial Times, meanwhile, noted from the same figures that house prices increased by 22 per cent last year, but that “there were signs of the rise slowing in the final quarter”.

There continues to be considerable confusion in the residential property market between slowing rates of increase and falling real prices. This can trigger either misplaced investment weakness on unfounded fears, or undue optimism supporting the market.

Either way, the property market is not a sound guide to a feelgood factor in consumer markets. The equities markets are rather more accurate, and here Brown has a real problem.

This government used to make much of the buoyancy of share prices under its stewardship. Not any more. While the FT All-Share index rose under previous Labour governments – by ten per cent under Harold Wilson in the Sixties and by an enormous 88 per cent under Wilson and James Callaghan in the Seventies – it has to date fallen by 19 per cent under Tony Blair.

The effect on the feelgood factor through investors’ pensions and what might now be called “without-profits policies” has its strongest adverse effect not on Blair, but on Brown. The Conservatives have coined the term “Brown bear market”, which may stick to the Chancellor.

To these burdens must be added the reputation for tax-and-spend policies that emerged last year, when Brown committed to subsidising public-sector expenditure through borrowing. The charge is largely misplaced. Brown’s taxes are set to rise by just 1.5 per cent of gross domestic product overall between 2000 and 2006.

But the image of old-style Labour tax-raids is not a helpful one as Brown approaches his Budget next month. Nor is he likely to be helped by his next-door neighbour. Blair is probably too busy saving the world to support his Chancellor at Budget time, but there are clear signs that he doesn’t want to anyway.

Brown must be smarting that he was left to defend the ludicrously insensitive £22,000 pay rise and subsequent unedifying climbdown of the Lord Chancellor (and Blair mentor), Derry Irvine. Furthermore, Number Ten gauleiter Alastair Campbell flagged up the problems of forthcoming tax increases in a rare speech the other day, supposedly private but naughtily leaked.

The idea that Campbell could have given a speech to the London School of Economics and not expected it to be leaked is risible. In it, he remarked that putting up taxes in April is going to be “very, very difficult”. He added that, although New Labour’s beloved focus groups suggest that people support tax increases if they are to fund better public services, “it is a very difficult thing to do when that opinion poll is translated into tax rises.”

No mention here of tax rises being a tiny proportion of GDP. It has long been accepted that the battle for primacy in the Government between Blair and Brown takes precedence over any joint stewardship. This determination by Number Ten to undermine Brown’s threat to Blair’s premiership is childish, but it has one very important implication for British business.

Brown is famously bearish about UK entry into the single European currency. As I have said before, this may be a classic piece of tactical positioning, making Brown’s eventual recommendation that his five economic tests for euro entry have been passed all the more powerful when it came.

But were Brown to be marginalised by a defensive campaign against him from Number Ten, UK businesses could face a strengthened Blair willing to force through a positive euro referendum. This might be further fuelled by a successful war against Iraq and a desire to heal the rifts caused by it in Europe.

As it happens, I’m a supporter of British euro entry. Nevertheless, British companies should be aware, in the context of an absence of effective political opposition, of the full implications of Brown’s prospective decline from power.

George Pitcher is a partner at communications management consultancy Luther Pendragon

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