Hamish McRae: Brown grasps global challenge but response belongs to 1960s

Phew! It is nearly over. Gordon Brown's last (surely) pre-Budget report had an inevitable fin de siècle aura about it. He talked about plans for the next economic cycle, how government borrowing would be consistent with his "golden rule". There were projections for taxation and spending running on to 2011-12.

But we know this is meaningless. The next cycle, he has decided, now starts next year but he won't be Chancellor then. And whatever does happen to the leadership it is almost unbearable to think that he will be in public office in 2011. If he isn't, then it will be someone else's show and his pronouncements yesterday will have no more relevance then than those of, say, Norman Lamont, who was Chancellor at the beginning of the long boom, have now.

So what do we make of it all? There was certainly a lot of bumf. The core report was 265 pages and there were eight other documents included in the package, including a report on long-term fiscal sustainability with projections running to 2055. And there were another 44 documents published by the Treasury and the Revenue and Customs.

As always the detail is more interesting than the rhetoric. Three examples.

First there has been a slight further deterioration of the Government's borrowing position, as there has been every year for the past five and this despite faster-than-expected growth.

Second, he has now for the second time changed the date of the end of current economic cycle so that there is no danger of him breaking his golden rule. It was supposed to end in 2008-9. Now it will end early next year.

And third, the Civil Service is now expected to achieve 3 per cent productivity gains each year, and the increases in its output are based on that assumption - hence all the stuff about transferring resources to "front-line" services. That is a really tough target for any service industry to achieve and establishing a culture of efficiency in the public sector is going to be difficult. But given the state of public finances there is no alternative but putting civil servants on a diet.

These are little things, but they tell a big story. That story is sketched in the two graphs, both of which come from the report. The top one shows how the long-term downward trend of public spending as a proportion of GDP, which began in the middle-1970s under Denis Healey, seems to have ended around the year 2000, when Gordon Brown was three years into the job.

The bottom chart shows the trend in taxation from the early 1980s onward and this time projected to 2011-12. Actually the projections are a little bit lower than in previous reports as the economy is projected to grow more quickly, an assumption which sounds dodgy but actually is quite reasonable. Independent projections of the UK's potential growth rate range up to nearly 3 per cent a year, and are generally higher than the Treasury's 2.75 per cent. (That has been revised up from 2.5 per cent.)

But taxation now at 37 per cent of GDP and rising to 38 per cent, means that the tax burden under Gordon Brown will have become the highest it has been for 20 years. Voters have to decide whether that is what they really want. Would we rather spend more of our own money or would we rather have the government spend it for us?

This is a huge issue and is usually presented in terms of better services or tax cuts. But if you step back from the politics it surely should be more about the most effective way of providing services that people want and need. Should we expect the government to be able provide us with high-quality services taking say 35 per cent of GDP? Getting down to the low 30s would be tough, though Ireland has achieved that. But the global trend is for smaller government and the UK is no longer a particularly low-tax regime. And of course it is a high-tax region when compared with the admittedly very different challengers from Asia.

You can dismiss the Chancellor's rhetoric about the challenge from China and India as just that: words. There is a problem with Gordon Brown that what he says is different from what he does. Like all politicians he finds it hard to see what he is doing as a continuing process, taking over a framework from previous Chancellors and passing it, modified a bit, to his successors. So he finds it hard to acknowledge that he took over the stewardship of an economy that was in very good shape.

He also would find it hard to admit that he squeezed public investment too tightly in his first term of office. On page 258 of the report you can see that public sector net investment (in today's money) was running annually at £11bn-£16bn in the years between 1989-90 and 1995-6 but plunged to £4bn-£7bn in the period 1997-98 to 2000-01.

I was astounded to read those figures. Sure, investment has risen sharply since then and sure the investment in the late 1980s under the Tories was indeed far too low. But all that stuff about having to compensate for low investment when he came into office is factually misleading. On his own figures he made the situation much worse. A lot of the backlog in infrastructure dates back to projects cancelled or postponed in the late 1990s on his watch. You just have to be a bit nerdy and read to page 258 to spot it. (McRae secret weapon: start reading all government documents from the back.)

But - and this seems to me to be the most resonant part of yesterday's presentation - Gordon Brown is absolutely right about competition from the new economic giants. Those figures he gave about their output of graduates dwarfing ours puts into focus the challenge all the old developed countries face. We just have to be cleverer, better educated and more flexible. We have to adapt.

A lot of us find it fascinating that someone who really genuinely understands the changing nature of competition in an ever more global world comes up with such 1960s top-down responses to it. The idea that a Treasury scheme spending a few millions on some initiative is going to have a material impact on anything is absurd. What you need to do is get the very big decisions right, such as the planning freedoms that created Canary Wharf.

But let's, since this will be the last such report from Mr Brown, celebrate the fact that he does understand the way the world is changing. That is the essential starting point - and it will be someone else's job to help set the framework for the UK response to that challenge.