BROWN'S ECONOMIC PRIORITIES AND CHALLENGES

C O N F I D E N T I A L SECTION 01 OF 03 LONDON 001947

SIPDIS

SIPDIS

E.O. 12958: DECL: 05/16/2017
TAGS: ECON PREL EFIN PGOV PBIO UK
SUBJECT: BROWN'S ECONOMIC PRIORITIES AND CHALLENGES

REF: A. A) LONDON 1051

B. B) LONDON 1291

C. C) LONDON 1763

Classified By: E/MIN Sandra E. Clark for Reasons 1.4 (b) and (d)

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SUMMARY AND COMMENT
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1. (C) Gordon Brown is the longest continuously serving
Chancellor of the Exchequer since 1823. During his ten year
reign, Brown has enjoyed tremendous authority and autonomy in
managing the UK's economy. As a result, Brown is expected to
continue the economic and financial policies he developed as
Chancellor when he becomes Prime Minister by the end of June.
Over his tenure, Brown has been able to refine his vision
for the UK government's role in the economy. After some
tinkering, each of Brown's last four budgets started with the
same message: "The Government's economic objective is to
build a strong economy and a fair society, where there is
opportunity and security for all." Brown recently, and we
believe reluctantly (Refs A and B),added caring for the
environment as a third government objective. Brown's
economic focus will remain on these three pillars: 1)
economic growth based on stability (low inflation),2) social
justice driven by improving the quality of and access to
education and training,
and 3) caring for the environment through international
action and domestic incentives. These pillars will also
continue to inspire his international economic policies.


2. (C) Despite devoting significant resources and achieving
some success, challenges remain to Brown's credibility in
each area. Nevertheless, we expect Brown to frame the debate
on economic policy in the early days of his leadership by
highlighting his three objectives. The economy will remain
comfortable ground for Brown to return to as compared with
the less-popular aspects of Tony Blair's legacy in Iraq and
the Middle East (septel).

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A Stable Macroeconomic Foundation
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3. (C) Gordon Brown is passionate about the social goals at
the heart of the Labour Party. His commitment to economic
stability stems from the belief that without a firm
macroeconomic foundation (low inflation, low interest rates,
low unemployment, and solid growth),the government would not
have the time or resources to devote to solving Britain's
social ills. His 2007 budget states that the government's
"long-term economic goal is to maintain macroeconomic
stability, ensuring the fiscal rules are met at all times and
that inflation remains low." He frequently compares the last
ten years under his leadership with the old British "stop-go"
economy of the 1980s and early 1990s. The recent "longest
period of unbroken growth and stability in (UK) history"
actually started about four years before Brown assumed
responsibility for the economy. In addition, he has
benefited from a remarkably stable global economy. However,
most analysts agree that Brown improved conditions when he
granted the Bank of England
independence in 1997, consolidated regulators for financial
services and telecommunications, and installed reasonable, if
not firm, fiscal rules. Another key move was Brown's
decision to embrace London's financial sector. In June 2006,
Brown wrote a comment in the Financial Times claiming, "Our
economic leadership abroad and our stability at home depend
on our continuing to have the strength to take the right
long-term decisions and to put stability first. That is the
test by which I want to be judged."


4. (C) Brown's record for running the British economy is his
strongest asset. Nevertheless, criticisms remain. Despite
the impressive performance of the overall economy, the
outlook for public finances has deteriorated recently. In
his most recent budget, Brown controversially ended the
current economic cycle (starting in 1997-98) in 2006-07 in
order to meet his own "golden rule" of balancing the current
(non-capital) budget over the entire economic cycle, rather
than risk missing this target with future deficits. This
redefinition will make it more difficult for Brown as Prime
Minister to justify reducing taxes or further increasing
spending on public services in the next economic cycle.
Brown has earned a reputation for introducing "stealth" taxes
by cutting some tax breaks, raising marginal tax rates, and
creating new tax schemes in order to maintain high levels of
spending while lowering the headline personal and corporate
tax levels. Although efforts are underway to reduce the
administrative costs
of doing business and to expand the risk based approach to
regulation adopted by the Financial Services Authority more

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broadly, critics claim that bureaucratic requirements have
increased, rather than declined, under Brown. Some
traditionally British companies have moved their headquarters
abroad to avoid paying UK taxes. He is under pressure from
public sector unions for capping pay increases in an attempt
to increase the proportion of spending that goes to
front-line services. Most recently, his stewardship of the
overall economy has come under scrutiny for the first time as
the March inflation rate reached 3.1 percent, the highest
rate since Bank of England independence (Note: the inflation
rate fell back down to 2.8 percent in April).

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Britain's Answer to Globalization: Education and Skills
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5. (C) Brown concluded his December 2006 pre-budget speech to
the House of Commons stating "Stability (is) our foundation.
Education our number one priority." Regarding globalization,
Brown takes as a given an open investment climate for the UK
and will continue to advocate for a freer trade environment
to benefit the UK economy and the developing world (Ref B).
During his tenure as Chancellor, Brown has promoted new
skills, entrepreneurship and innovation as ways for Britain
to meet the challenges of globalization. Brown is fond of
the "American entrepreneur spirit" and has often used his
meetings with U.S. Secretaries of the Treasury to encourage
more enterprise and innovation in the UK. In November 2003,
Chancellor Brown and former Treasury Secretary John Snow
launched a "U.S.-UK Initiative on Productivity" aimed at
spurring entrepreneurial links between U.S. and UK
universities in research, technology and management. At the
November 2006 CBI national conference attended by Secretary
Paulson, Brown
argued that "the challenge for Britain is to out perform our
competitors, the answer to the jobs lost through offshoring
is to upskill, and the answer to outsourcing is to out
innovate." More recently, Brown told the Confederation of
Indian Industry in Bangalore "the answer to globalization is
not protectionism to safeguard the old interests of a few,
but education that opens up opportunity to realize the
potential of the many. And so the best economic policy is a
good education policy."


6. (C) When criticized about the size of the fiscal deficit,
Brown argues that he could pursue a balanced budget policy
but instead chooses to borrow in order to fund investment in
education, health, transport and housing. He has increased
the capital investment in schools almost six-fold since 1997
and intends to raise the amount of money spent per pupil in
public schools to the level spent per pupil in private
schools. Few criticize the government's commitment to
increasing funding for education and building professional
skills in the UK. However, there is much criticism regarding
the effectiveness of those funds. The Chancellor is unlikely
to meet many of his ambitious targets for spending per pupil,
improving test scores, expanding adult education and
increasing workforce skills. Despite the increased spending,
the UK remains below the OECD average for proportion of
qualified adults. In March, the director-general of the
British Chambers of Commerce (BCC) said the training system
reforms were not ma
king any difference, referring to a BCC survey showing more
than half of the 304 employers questioned were finding it
more difficult to find skilled staff today than five years
ago.


7. (SBU) In one of his first announcements in his campaign to
become the next Labour Party leader and UK Prime Minister,
Brown said on May 15 that his priorities for education will
focus on the quality of what is taught in the classroom (i.e.
education standards),rather than on new school structures.
He is expected to announce the launch of an initiative called
Every Child Counts that will provide one-to-one tutoring to
around 300,000 primary schoolchildren who are struggling with
math. The program is expected to cost around GBP 35 million
(USD 70 million).

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From Debt Relief and Aid to Empowerment
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8. (C) Education is not only the answer for Britain, but also
the answer for development, according to Brown. Speaking to
New York University in December 2005, Brown said, "we should
begin 2006 with a new resolution, an urgent timetable for
every continent, every country, to offer one of the greatest
and most achievable gifts of all in every continent:
universal free education for all children - a declaration of
our faith in the future." In a March 2006 speech, Brown
argued for a new Marshall Plan for developing countries "that
has got to be based not on simply debt relief for the poor -
that was the issue of the Eighties and Nineties that we've

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had to solve - or on simply aid as compensation for the poor,
it's got to be about empowerment for the poor." At a May 2,
2007 conference hosted by the European Commission and World
Bank, Brown urged rich countries to live up to the promises
made at the 2005 G8 Summit in Gleneagles to increase
international aid by USD 50 billion by 2010 to meet UN
poverty targets. "We can be the first generation in history
to send every child to school. We will work with every
country, charities and international organizations to achieve
this goal." In 2006, Brown committed Britain to provide at
least USD 15 billion over the next ten years to finance
education in Africa - four times as much as the USD 3.5
billion of the previous ten years.


9. (C) With sociaQustice through empowerment as the
ultimate goal, we still expect Brown to continue to support
direct assistance to the poor both within the UK and abroad,
in particular in Africa. Domestically, Brown has targeted
children by promising to raise the child tax credit from GBP
575 per year in 1997 to GBP 1,040 in 2010. For the poorest
child, he raised the tax credit from GBP 1,400 in 1997 to GBP
3,900. Despite his efforts, child poverty remains a stubborn
problem in the UK. After years of declines, the number of UK
children in relative poverty jumped by 200,000 in 2005,
leaving it far from its targets. The UK also placed last
among 21 industrialized economies in the most recent UNICEF
measure of child well-being. Internationally, Brown has
championed debt relief for the poorest countries through the
G-8 Multilateral Debt Relief Initiative (MDRI) and borrowing
to fund the expensive International Finance Facility for
Immunizations (IFFIm). Most recently, Brown has expressed
interest in
better coordinating the UK's anti-malaria efforts with
President Bush's Malaria Initiative (Ref C).

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The Third Pillar: Climate Change
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10. (C) In March 2007, the same month he delivered the 2007
budget to the House of Commons, Brown told the Green Alliance
that the UK had to "...go beyond the traditional alliance of
economic growth and social justice as the central concerns of
policy, and put growth, justice and environmental care
together as our trinity of objectives." As previously
reported (Refs A and B),Brown was a late convert to the
climate change cause and reluctantly dragged into the debate
with an eye on the 2009 elections. Despite domestic
pressures, his primary focus is on an international solution.
He sees the European Union finding a new and unifying role
in protecting the environment and tackling climate change.
He plans to use the G8 to urge a resumption of UN
negotiations based on the five elements of - "a long-term
stabilization goal; emissions trading; technology development
and deployment; deforestation; and adaptation." He argues
the World Bank, "once a bank only for economic development,
must become a bank for the
environment as well." And he believes the UN Environment
Program should be upgraded into the environmental policy
pillar of the UN system.


11. (C) Domestically, Brown has been less ambitious. As
Chancellor, he tinkered with tax incentives for innovation
and conservation. Eyeing London's strong financial services
sector, he states his "primary ambition is to build a global
carbon market, founded on the EU Emissions Trading Scheme and
centered in London." Otherwise, his initiatives have
disappointed environmentalists, especially after the momentum
created by the Stern Review on the Economics of Climate
Change commissioned by Brown in July 2005 and published in
October 2006. In December 2006, Brown announced an increase
in the air passenger duty as an environmental initiative. In
reality, the money flows into the general coffers and can be
spent however Brown chooses. Opposition leader David Cameron
will no doubt continue to challenge Brown's credibility for
failing to take stronger action against climate change while
serving as one of the most powerful Chancellor's in Britain's
history. See our upcoming cable for more detail on Brown's
position on this topic.

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