Why Brown is doing a lousy job

THERE is a sad tale of a young man, dropped on his head when young, who believed what he read in prospectuses. A tendency to accept what we are told is an amiable weakness. But in financial matters it can come at a cost, as Enron's shareholders and bankers know all too well.

The tendency to naivety over figures is not limited to companies. The figures that governments publish should also be taken with a ton of salt, particularly their financial ones. It will soon be Budget time in Britain and this always unleashes a comedy of nonsense.

Many who should know better will write about the size of the budget deficit. They will assume it will determine the Chancellor's tax plans. What they should be considering is the economy.

There are two ways to manage an economy. Demand responds to changes in budget deficits and in interest rates. Both should be used to keep the economy in balance.

This presents two separate problems. Overall demand, like baby bear's porridge, should be neither too hot nor too cold. This is the responsibility of the Bank of England and it seems to be doing a pretty good job.

The second problem is to ensure balanced demand in different sectors. This is be the role of the Chancellor. As the latest data show, Gordon Brown is doing a lousy job. In the last quarter, service output was rising at an annual rate of 3.5% while manufacturing fell 8%.

Treasury economics boss Gus O'Donnell has got into trouble for telling half the truth. He pointed out that, in Britain, the Chancellor and the Governor of the Bank of England could pursue compatible economic policies. This gave the UK an advantage over Euroland which, with 12 separate finance ministers, has little chance of doing so.

This was only a half truth because, in practice, it has worked the other way. While Brown could have pursued fiscal policies that were compatible with our monetary ones, he has chosen not to do so.

Tax policy should be designed to bring Britain's economy back into balance. This means putting up taxes so rates and sterling can fall. The wrong exchange rate causes great damage. Japan and Britain give cause for concern in this respect.

When East Germany joined the West at the 'wrong' rate, in 1990, its currency was popular. 'Ossies' thought they would be better off if their bank deposits and wages were changed into Deutschmarks on a one-for-one basis. It was a mistake. Despite billions being shifted from West to East, unemployment in the latter is around 20% and the economy is stagnant.

Misery caused by overvalued currencies is often forgotten. East Germany shows why. In the short run they are popular. They keep down prices and boost real incomes. The damage is done in the long term.

www.smithers.co.uk