The economic quackery of Gordon Brown

Date: 20/10/05

David Miliband, the United Kingdom's local government minister, chose an unfortunate moment to reveal the dire state of thousands of British neighbourhoods last week.

His speech, to the British Urban Regeneration Association, came just as Gordon Brown, the UK finance minister, was releasing, ahead of the informal EU Hampton Court summit next week, his pamphlet on economic reform in the EU, Global Europe: full employment Europe.

Miliband, one of the government's bright young stars, disclosed to the Association that there are now 3,500 neighbourhoods in the UK (defined as areas of about 1,500 people), with a total population of 4.4 million people (7% of the entire population), in which abject poverty and extreme deprivation are the rule. One in four people living in these areas is unemployed, three in five have no, or very low qualifications, and two in five believe they live among high levels of social disorder - crime, drugs, violence and physical insecurity.

Coincidentally, on the same day as Miliband spoke, the Organisation for Economic Co-operation and Development (OECD) published its latest analysis of the UK economy. News reports headlined the OECD's decision to cut its forecasts for the country's economic growth, from the 2.4% it predicted in June, to 1.7%. But it was the OECD's seminal structural analysis of the UK economy which was most revealing and unhelpful to Brown.

Critics of the UK economy have long argued that its excellent ten-year growth record, most recently based on increases in public expenditure which have accounted for half of all jobs created since 2000 and a housing inflation financed consumer boom, hides a multitude of sins. Like the 'continental model' the 'British model' has structural flaws as well as shaky cyclical foundations.

On the former, which is most important, the OECD, in a revealing chapter, describes as "mediocre" the UK's performance in the field of technological innovation. If this does not improve, the UK will lose out in what Brown calls the competitive "race to the top" against China and India. The OECD also asserts why the UK is doing so badly here: unlike France, Germany and Finland, it has too narrow an industrial base. It only has one major hi-tech global competitor in manufacturing: the pharmaceuticals industry. Forget telecoms and automobiles.

The OECD also says that "lack of skills in large parts of the workforce", a major problem for the UK, is a key factor holding back the capacity to absorb innovation and "take advantage of new technologies".

As for the cyclical outlook, it is not good either, even though the Bank of England may have succeeded in achieving a soft landing for the UK housing market - incidentally only by stepping outside the inflation targeting monetary policy regime it is supposed to operate under and which Brown would like to impose on the eurozone. Mervyn King, the governor of the Bank of England, warned that the UK economy's performance was likely to be "more volatile than the calm waters to which we have been accustomed".. Roger Bootle of the London consultancy Capital Economics, while rejecting the risk of a UK recession in 2006, is calling for more rate cuts from the Bank of England, needed, he says, to stabilise the economy.

So, as the OECD suggests, the truth about the 'British model' is that it has good bits and bad bits. In the globalised world, its flexibility is admirable. Whether it has, or is developing, the technological capacities to compete in the long term is a more open question.

Brown's strength is that he is actively publicising the scale of the competitive challenge which Britain and Europe face. His weaknesses are that he has very limited work experience outside of politics, showed limited interest in business before he became shadow chancellor, speaks fluently no languages other than English and has never lived in continental Europe for an extended period of time. Would you ask somebody who had never studied medicine to be your doctor?

Analysis feature in which the author suggests that economic assessments of the UK by among others the OECD came as bad news for the British Chancellor in the week before the informal European Council at Hampton Court, 27 October 2005, where he was planning to propagate his economic policy ideas for Europe.