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
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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 , 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.” 
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” .
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 , 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 , 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 .
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 .
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.” 
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.
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.
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” . 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” , 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.” 
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?”
“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.” .
That was another instance of treating people like fools and Cameron has made hay with that too.
Labour & Trade Union Review
20 January 2007