Economy: Rising taxes and falling incomes mask growth

Gordon Brown recently joked that there were only two kinds of chancellor - those whose careers end in failure and those who get out in time.

This usually received an appreciative laugh from an audience that remembered the hubris of the Tory chancellor Nigel Lawson who cut taxes at the height of a boom and brought on the worst recession since the Second World War. But now, with a stagnant economy, a ballooning public finance deficit, manufacturing in recession, rising taxes and falling incomes, it looks increasing likely the last laugh will be on the Chancellor.

Despite his successful track record to date, the man known as the Iron Chancellor is showing signs of rust. No one in the City believes Mr Brown's forecasts that he can keep borrowing under control, instead predicting deficits as high as £40bn that would put Britain in breach of EU rules.

They believe he will fall short of his forecasts both for economic growth and for the turnaround in the fortunes of the financial sector that he is relying on to deliver the tax revenues needed to pay for his spending. If the City is right, he will be forced to raise taxes again or cut spending plans - neither of which would be politically acceptable.

The third choice - to borrow yet more - could undermine the City's faith in his arithmetic, which could trigger a sterling crisis similar to those that bedevilled previous Labour administrations.

The vultures are starting to circle. The Centre for Policy Studies, a free-market think tank, claims Mr Brown has missed many of his goals.

It said economic growth had grown 2.4 per cent a year under Labour compared with 3.2 per cent during the last five years of Tory rule - conveniently avoiding the 1990-91 recession. Productivity has got worse and investment has collapsed. The tax burden has risen from 37.7 per cent in 1997 to a projected 40 per cent by 2006 despite Mr Brown's pledge to keep it "as low as possible".

Until recently Mr Brown's chancellorship had been notable for its success. The pledge most people recall is his oft-cited clarion call of "no return to boom and bust". And despite the current downturn, Labour can claim to have kept its promise. The economy has grown in every quarter since Labour was elected, in contrast with our main economic rivals - Japan, Germany and the United States - who have all suffered a recession in the last couple of years.

If someone had suggested in the early 1980s that a Labour government would oversee low inflation and interest rates, solid economic growth, a strong pound, record high employment, a surplus on the public finances and a housing boom, they would have been laughed out of court.

But the fact that this - at least for the time being - has happened is due to Labour's economic policy.

When Tony Blair led the party into Downing Street in 1997 he knew it was the party's weakness on economic policy that kept it in the wilderness for 18 years.

As a result, the new Government - and specifically its Chancellor - immediately took some decisions that have delivered some of the most benign economic conditions for a generation.

Mr Brown and his team of personal advisers, who had helped formulate policy, implemented three key strategic changes in May 1997.

The first - and most significant - was to take the politics out of monetary policy and hand over the power to set interest rates to the Bank of England.

Instead Mr Brown set a target of 2.5 per cent. Since then inflation has stayed around that level - something not heard of in modern British economic history - allowing business to plan without the nagging worry of an inflation crisis around the corner.

The second was to set up a framework to ensure balanced public finances and to freeze spending in line with previous Tory policy for two years.

The result - wildly unpopular with public services unions - was a multibillion-pound surplus to use to fund a spending drive on health, education and transport.

Lastly, Mr Brown implemented what might be described a truly socialist policy - the New Deal that taxed the rich public utilities to provide jobs for the poorest in society. It contributed to a record number of people in work and the lowest unemployment total for 27 years and the lowest in the G7 group of rich nations.

There is one other achievement - one that Mr Brown has been less keen to trumpet - a redistribution of wealth from the richest in society to the poorest. Using a complex mix of tax credits, he has boosted the incomes of the poorest tenth of society by 15 per cent and cut the richest group by 3 per cent.

So far, then, this is one Labour government that has not had the embarrassment of a financial crisis caused by loss of confidence in its policies, but the storm clouds are gathering.