Hamish McRae: Budget that fails to confront difficult days that lie ahead

The headline rate on the two headline taxes is going down, but the tax take is going up

Look at the numbers; not at the words. This is such a basic rule of how to understand Gordon Brown Budgets, the golden rule I suppose you could call it, but he is so accomplished in his presentation that it needs repeating every time. There is a second golden rule too, which is that the full import of what he has done only becomes apparent a few days, maybe even weeks, after the event. Meanwhile however, let's see what his own numbers say about his Budget.

Start with tax. The headlines are that corporation tax is being cut from 30 per cent to 28 per cent and the basic rate of income tax from 22 per cent to 20 per cent. Now the numbers. The Budget papers are hugely complicated but within the great wodge of bumf there are pearls of clarity. One is a table in the Financial Statement and Budget Report on page 285. This is the nerdy report that gives the detail of the country's finances, as opposed to the main Economic and Fiscal Strategy Report and the speech itself, which attract most of the coverage.

This little table shows what has been happening, and what is projected to happen, to the various different tax revenues as a percentage of GDP. Take income tax. Last year the yield was equivalent to 10.9 per cent of GDP and this year, the tax year that ends in a couple of weeks' time, it will be up to 11.3 per cent of GDP. In the coming year, it is projected to go up to 11.4 per cent of GDP and the year after, when the next tax regime starts, it goes up a bit further, to 11.5 per cent of GDP. So you see, despite the cut in the headline rate, the total tax take rises both absolutely and proportionately.

Now look at corporation tax. The tax changes are billed as being revenue neutral but here the corresponding figures of revenue as a percentage of GDP and excluding North Sea revenues are: 2.8 per cent, 2.9 per cent, 3.2 per cent and 3.2 per cent. So again, notwithstanding the headline business-friendly move, the total tax burden is rising and is projected to rise further.

To point this out is not necessarily to attack the decision to increase taxes. If you are going to do that there is a good case for getting the tax from existing big taxes rather than creating lots of new little ones. The point is simply that the headline rate on those two headline taxes is going down but the tax take is going up.

There is no similar simple guide to trends in spending. We know overall public spending is rising as a percentage of GDP to a little over 42 per cent, compared with around 40 per cent when Mr Brown took office. The general picture that the Chancellor paints of more money going to health and education is right but it is only when you look at the detail that you see quite how strong the squeeze is on several other departments. For example, in his speech the Chancellor spoke of giving more money to the military to pay for Iraq and Afghanistan. This year that is true: its current budget is up from £33.4bn to £33.7bn. But next financial year, the one just about to start, that comes back down to £32.8bn. Add higher salaries and the other increased costs and you can see there is a savage squeeze.

The key number here is 3 per cent. That is the annual saving in efficiency that the public sector as a whole is supposed to achieve. It was mentioned in the speech but largely escapes comment. Yet that sort of saving, in a service industry, is terribly difficult to achieve. In private-sector service industries you are lucky to get half that and whatever view you take of the excess fat in the public sector, scrunching out that sort of increase in productivity is going to be terribly difficult.

I don't think people realise fully the dynamics of the past decade as they relate to public spending. Because he has been here so long and is saying much the same things he did 10 years ago we assume he has behaved consistently over this period. He hasn't.

He started with three years of squeeze on public spending, cutting the capital budget, public investment, below the levels that the Tories had maintained in the final years of office. Overall public spending fell to 37 per cent of GDP, not just lower than under Margaret Thatcher but lower than any period since the 1960s. Then he went on his spending spree, increasing spending for seven years faster than the increase in output. That period is now drawing to a close, not just because he is giving up the job, but because the increase in tax levels is such that he is meeting political resistance.

This will create huge problems for his successors. They will not realistically be able to borrow much more. This year the Chancellor has come in just about on his original borrowing target but his projections show the deficits only inching downwards. Indeed they seem to be coming down more slowly than he projected three months ago. It will be tough to try to balance public finances over the next economic cycle, starting from this base.

Meanwhile, they are saddled with a public sector that is expected to achieve increases in productivity that it has never managed, I think, throughout the entire post-war period.

And yet and yet and yet... the fact remains that the British economy has performed remarkably well in the past decade. There are of course concerns, including the fact that it has become even more of a two-tier economy, with the super-competitive London, the South-east and East Anglia, and the rest. You could argue that he inherited this competitive advantage, that it had very little to do with him. You could argue that at the margin the additional complexity he has loaded on to the system has undermined some of that competitiveness. But he has understood intellectually how competitive advantage in the present global economy is achieved and sustained. I don't think the next 10 years will be as easy as the past 10 but meanwhile he has a right to take some of the credit for what, in economic terms, has undoubtedly been a successful decade.