So this is what New Labour is really all about

on a budget that will prove the defining moment for Blair's first term

THOSE commentators who claimed last July that the Chancellor should have tightened fiscal policy more markedly in his first Budget should now be eating their words. The underlying fiscal stance tightened by over 2 per cent of gross domestic product in 1997/98, the sharpest budgetary tightening since the famous Howe Budget in 1981. Of course, they are still complaining, but what more do the fiscal hairshirts want? Even the IMF would not ask for such draconian action from an emerging nation facing economic ruin. And Britain is certainly not that.

But the debate on the fiscal stance is really missing the point of Gordon Brown's first full Budget. Like it or loathe it, this Budget will be the defining moment for Mr Blair's first term. At long last, there is some meat on the New Labour bones. In fact, the Chancellor's economic strategy, as spelled out in the Red Book, "New Ambitions for Britain", is certainly the most ambitious, and probably the most coherent, statement of a government's overall economic objectives since the heyday of monetarism in the early and mid-1980s.

In those days, Nigel Lawson and Terry Burns combined to provide for the Thatcher government a plan of action that was based on a clear and consistent set of economic principles. Not all of them proved valid, but at least they enabled the government to unite, not only around a series of ends, but also around the means to those ends.

It was never quite the same in the remaining Chancellorships of the Tory era. John Major was more interested in the minutiae of politics than anything else. Norman Lamont was clearly capable of devising a coherent economic plan, but it did not happen to include membership of the exchange rate mechanism, so that was beside the point. Ken Clarke was an excellent Chancellor (at least until he succumbed to electoral temptation in 1996), but he would have considered it an insult to be told that his actions were inspired by anything more than bluff common sense. Economics, as such, was simply never his cup of tea.

It is clear, in contrast, that the contents of the 1998 Red Book have been substantially driven by a Chancellor who, for good or ill, does care about economics. The unifying objective is stated baldly and frequently: to raise the UK's underlying rate of growth in GDP. The Treasury accepts that this is a very ambitious objective. Indeed, they point out that Britain's long term growth rate has remained stubbornly fixed at around 2.2 per cent per annum ever since the mid-nineteenth century. Despite a temporary blip in the 1950s and 1960s, the average growth rate since the war has been no higher than in the previous hundred years.

With other comparable countries generally doing better than Britain, this has left us trailing Europe and the United States in terms of productivity and living standards. Gordon Brown clearly finds this an unsatisfactory state of affairs, and almost all of his major policy initiatives are designed eventually to close the gap between British living standards and those of our main competitors.

This is why he has established a new framework for macro-economic management which seeks to prevent sudden lurches in either monetary or fiscal policy causing unnecessary volatility in the economic cycle. The thesis here is that it is no fluke that the economic cycle has coincided with the electoral cycle - the temptation to use economic policy instruments to stoke election booms has simply proven too great for mortal politicians to resist. The resulting booms and busts have lowered the propensity of the private sector to invest and have weakened the labour market. Hence the decision to delegate monetary policy to the Bank of England, subject to an inflation objective set by the government. And hence the more recent decision to legislate a Fiscal Code which will increase the transparency and accountability of future Chancellor's budgetary decisions.

Critics have suggested that this new straitjacket removes too many degrees of freedom from economic policy makers. But this need not be the case. There has been nothing to explain the Bank's puzzling failure to pursue a firm domestic monetary stance since the election except its own internal machinations. (It was highly amusing last week to read in the press that the Treasury was emphasising the tightness of its fiscal measure in order to dissuade the Bank from raising base rates. Nothing could possibly be further from the truth.)

Nor is there anything in the new Fiscal Code to prevent the Chancellor from implementing a counter-cyclical budgetary policy stance if he so chooses. As it happens, Mr Brown tends to believe that fiscal policy is necessarily rather heavy-footed, and is mainly suited to providing a back- drop of medium-term stability, but this has not prevented him from weighing in with a healthy dose of budgetary stringency in the past 12 months. Fiscal fine tuning was not the main intention here - indeed, the failure of such a massive dose of budgetary tightening to slow domestic demand in the past year should be a salutary lesson to staunch believers in fine tuning - but it was a useful by-product as the medium-term fiscal problem was being corrected.

The new macro-economic straitjacket is not the only, or even the main, element in the Treasury's new approach. In addition, there are at least three other major areas where direct action has been targeted under the Brown strategy. First, reform of the labour market - Welfare to Work, and now the concerted effort to "make work pay" at the bottom end of the income scale - is intended to reduce structural unemployment, and thus increase economic growth as the jobless total falls to its new sustainable level.

Second, cuts in corporation and business taxation are intended to boost the level of business investment in the UK. As the Treasury clearly spells out, the present levels of capital investment are insufficient to support even the current rate of GDP growth, let alone anything higher. (So much, incidentally, for those rather odd souls who still contend that capital spending and economic growth are unconnected.)

Third, and most ambitious of all, the Red Book states quite specifically that "growing inequality not only has serious short-term social consequences, but it weakens the long-term potential of the economy." The government is therefore "determined to create a fairer, more equal society" - the first time, to my knowledge, that the Red Book has enshrined a target to reduce inequality alongside the usual inflation and PSBR objectives. This is a departure of considerable importance, and one which should not be overlooked by those who claim that New Labour's economic strategy is nothing more than a re-hash of old Tory objectives in the hands of a new breed of spin doctors.

A stable macro framework, lower structural unemployment, higher business investment, and a more equal society - lofty ambitions indeed. The 1998 Budget is but a step towards these ambitions, albeit clearly a step in the right direction. Like the first Thatcher Budget of 1980, 1998 will be remembered not only as a road map for a new government, but as a yardstick against which its future efforts will come to be measured.