Commentary: Britain Can't Afford Big Government

By Stanley Reed

In the early years after Britain's Labour Party took power in 1997, Chancellor of the Exchequer Gordon Brown was such a penny pincher that he earned himself the nickname "Iron Chancellor." A better sobriquet these days would be Mr Softie: Seemingly oblivious to stock markets tumbling around him--and to the looming risks to the economy--Brown is promising real increases in public spending averaging 4.3% a year through 2006.

In a remarkable about-face, Brown and his boss, Prime Minister Tony Blair, have launched into what is likely to prove a quixotic project to rescue Britain's foundering welfare state. They are trying to soothe growing public anger about everything from long waits at the National Health Service to rail crashes to lack of affordable housing in London. Blair & Co. are also under attack from public-sector unions, which staged a one-day national strike on July 17 and are threatening further disruptions if the government does not improve its offer of a 3% raise.

Hikes in public spending may make for good politics, but they're bad economics. To fund the budget increase, Brown plans to raise the national insurance tax levied on companies and individuals by a point each, to 12.8% and 11% starting next year. That amounts to a $12 billion tax increase--the last thing Britain's economy, which has so far skirted recession, needs just now. The "cumulative effect is to chip away at Britain's competitiveness," says Ruth Lea, head of policy at the Institute of Directors, a business group.

Lea and others think that Brown is picking an inopportune time to jack up government spending. The chancellor expects the economy to log growth of 2.5% this year and 2.75% the next. But with the benchmark FTSE stock index now at 1996 levels, such forecasts appear optimistic. If faced with an unexpected slump in tax revenues, Brown will have to choose between hiking taxes further or upping borrowing, a move that could lead to higher interest rates. "There is no buffer if things get worse," says Ciaran Barr, an expert on the British economy at Deutsche Bank.

True, Britain's public finances are sounder than some of those on the Continent. Brown has used past budget surpluses to pay down debt, and this year's deficit will barely top 1% of gross domestic product. Higher spending may actually have kept the economy out of recession.

But a Keynesian shot in the arm is different from a steady rise in the government's participation in the economy. Brown now projects that the government's share of GDP will expand from 39.2% last year to almost 42% by early 2006. That is lower than France's 50% but much higher than the U.S. rate of about 30%.

Blair and Brown can afford to be cavalier about the economy because they lack an effective opposition. Despite new leadership, the Conservatives remain inept and unable to exploit growing disenchantment with Labour. According to YouGov, an Internet polling organization, Labour retains a lead of 4 to 6 percentage points--not much of a drop from the 9 points of last year's general election.

But some Labour insiders warn against complacency. "We don't know what state the Tories will be in three years from now" when an election is expected, says Frank Field, a Labour Member of Parliament. It's just conceivable that Labour will be ripe for the taking by then if the economy sours. Besides, giant bureaucracies such as the NHS are unlikely to show dramatic improvement. Labour isn't doing much to fix them besides shoveling in money.

Field, a public-services expert, faults Blair for not taking on the civil service bureaucracies. He argues that the NHS, for instance, needs to bring in private contractors from the Continent and the U.S. to speed up service and give patients choice. "It's still an old ration-book approach," says Field. Gordon's solution to Britain's problems--tax and spend--is distressingly old-fashioned, too.

Reed covers British politics and economics from London.

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