Gordon's still in the black, but not in the green

Playing the environmental card opens you up to hard questions about conflicting policies

Be fair. There comes a time, before elections, when all chancellors are cornered. The iron glove is wrenched off, the fistful of velvet revealed. Gordon Brown clearly did not want to unclench his grip until closer to polling day but he cannot be said to have lost hold of the economy. Inflation is still low, interest rates moderate, the public sector in the black. His worst (post-pre-Budget) problem is that he still has a long and potentially expensive way to go; and his spin doctors are trying too hard to fight on all sides of the argument at once.

Be fair. There comes a time, before elections, when all chancellors are cornered. The iron glove is wrenched off, the fistful of velvet revealed. Gordon Brown clearly did not want to unclench his grip until closer to polling day but he cannot be said to have lost hold of the economy. Inflation is still low, interest rates moderate, the public sector in the black. His worst (post-pre-Budget) problem is that he still has a long and potentially expensive way to go; and his spin doctors are trying too hard to fight on all sides of the argument at once.

Mr Brown first tripped up on his own spin earlier this year, when it became clear he had not, in fact, been pumping money into public services. The chart - taken from the pre-Budget report - shows how public spending has been reduced since the early 1990s, as a share of national income, and how the squeeze tightened in Mr Brown's first three years.

The pressure valves blew first in the health service. He had to change tack, and spending is rising fast. The chart also shows how - again despite ministerial protestations to the contrary - the tax share of national income has been rising; and here fuel duty became the pressure point. None the less, the pre-Budget report makes it clear that tax will go on rising. Well, "clear" is a bit strong.

Once again, Mr Brown's spin-doctoring is a doubtful blessing to him. It adds elements of mild incredibility to our public finances. Some £1.75bn of his most high-profile measures (notably the tax cut for low-sulphur fuel) are not included in the projections. And this year's rebate of lorry vehicle excise duty is rather bizarrely counted as public expenditure. These tweaks kept down the reported size of the package, in case the City should take fright, but add to the impression of an argument in Downing Street that the Iron Chancellor lost.

Either because the document is (yet again) excessively long, or because it was last-minute, the editing of the Pre-Budget Report is a bit ragged; and this reinforces the impression of a hasty distribution of voter sweeteners.

In fact, the mix is not that bad. Buried in the guff, there is new and encouraging evidence that the Chancellor is prepared to smooth off the jagged edges of past ideas, rather than add new layers of disconnected complexity. Admittedly, his pension reforms still look over-complicated - despite an inordinately long gestation period. And this delay has cost him dear: a couple of billion a year, in higher basic pensions.

Nevertheless, even including the sidelined £1.75bn, Mr Brown's package amounted to not much more than 0.5 per cent of what is about to become a trillion-pound economy. More of a boost than it needs at this stage of the economic cycle, maybe but - if that is all - pretty modest for this stage in the political one.

The question, of course, is whether Mr Brown will try to satisfy another long queue of lobbies on the real Budget day. Meanwhile, he has made all those ministerial attacks on the irresponsibility of competing Tory pledges look - shall we say - disingenuous. As specious, actually, as claiming that all responsibility for economic success post-dates Labour's arrival in 1997 (a time-limited approach the Government does not seem to be applying to the Millennium Dome).

Selective memory may be the stuff of party politics, but it is not working with the environmentalists. This is not, if it were honest, a particularly "green" government. It has had other priorities, like getting the electricity industry to use coal, and winning the political battle with the Tories over the cost of home heating. Fair enough. That's what people voted for. The trouble is that this chancellor takes the lead on almost every aspect of policy; and on this too he is trying to have the argument both ways.

One can see the temptation. Playing the green card is a brilliant excuse for more taxation, with the extra glow of (in pre-Budget lingo) taxing "bads" rather than "goods". Economic instruments are often more effective than regulation, and such interesting innovations as the trading of emissions permits are meat and drink to the Treasury. But it is dangerously easy to confuse tax-raising and environmental policy, and in the process get both of them wrong.

The Government's environmental targets are allotted their own substantial chapter in this Pre-Budget Report. The second chart shows the progress Britain has made so far in meeting international targets for greenhouse gas emissions. By now we have not merely met the Rio target set for 2000, but are even on course for the Kyoto target (which was set for 2010), putting ourselves well ahead of most developed economies.

But that, of course, makes British businesses and consumers reluctant to accept damage to their competitiveness, or their standard of living, by being pushed further into the lead.

At the same time, the chart makes clear that - on present policies - Britain's performance is going to get slightly worse rather than better. The Government needs to follow through its policies to get the line pointing down again. Most of the pre-Budget report was clearly written at the time when Mr Brown was arguing hardest with the fuel lobby rather than the environmentalists.

For the report makes clear that our environmental policies depend not only on the contentious climate change levy but also on the fuel duty escalator. And it points out that motoring costs have not risen at all, in real terms, since 1974 (largely because cars are nearly one-third cheaper to buy). Meanwhile, people's disposable incomes have risen by 87 per cent and the cost of travelling by bus or train has gone up nearly as fast.

Now, of course (for election year at least) the Chancellor has just put the fuel escalator into reverse, and tried to take the environmental trick by encouraging a switch to low-sulphur fuel.

That isn't so stupid. Total fuel use is not very responsive to price (that big jump in the price of public transport helps explain why). But price differentials between different types of fuel can have a big impact.

However, environmentalists have their eyes firmly fixed on carbon dioxide. And it is hard to deny that overall, his pre-Budget measures are likely to put emissions up.

What are the lessons for policy-makers? One: that they would do well to focus on the type of vehicle that is being bought, rather than try to tax people off the road, because that simply will not work. Two: they are wise to relate environmental policies to benefits people can see, rather than rest all the weight of argument on international commitments, which invite awkward comparisons.

However, three: that it is a mistake to dress too much policy up as "environmental", a claim that can easily backfire.

The fourth lesson is that policy-makers cannot avoid thinking about emissions as a whole (transport is, after all, only the third most important source). Which leads, finally, to five: that playing the environmental card opens you up to hard questions about contrary decisions and conflicting aims. Pure green is a hard colour to fake.

Sarah Hogg is chairman of Frontier Economics