Global Economics

Will Business Prefer Britain After Blair?


The nearly 10-year reign of British Prime Minister Tony Blair is coming to an end. The longtime leader of the Labour Party has been publicly humiliated by members of his own party and government. On Sept. 6, eight junior figures in his government resigned. "It is with the greatest sadness that I have to say that I no longer believe that your remaining in office is in the interest of either the party or the country," wrote one, Tom Watson, a non-Cabinet-level defense minister.

A day later, Blair was forced to say that he would be history by September, 2007, at the latest. "The next party conference in a couple of weeks will be my last party conference as party leader," he said, adding, "The next TUC (labor union) conference next week will be my last TUC—probably to the relief of both of us."

When Blair goes, it's almost certain that his successor will be the powerful Chancellor of the Exchequer, Gordon Brown—although the extraordinary public fighting is damaging him as well. While Brown is closed-mouthed and difficult to read, business is unlikely to face wrenching changes under a Brown premiership. That's because Brown has jealously held the economic reins under Blair.

THE REPLACEMENT. But what business may find unsettling is an almost certain continuation of certain directions that Brown has set with Blair's agreement, such as big boosts in government spending that have required tax increases. There's also a huge question about whether the 55-year-old Brown, a dour, secretive politician with a penchant for micromanagement, has the public persona to lead a large industrialized country in the early 21st century.

Many observers now think Blair will be out of office sooner than next September, perhaps this winter or next May, after celebrating 10 years in power. Important elections are scheduled in Scotland and Wales for May, 2007, and Labour activists worry that they could face a devastating defeat in those votes if Blair remains in power. A big worry, for instance, is that Scots could elect a Scottish nationalist-led government to punish Labour.

While Labour won't be required to call a general election until 2010, political trends on the national level are also unappetizing. Recent polls show the opposition Conservatives, whose fortunes have been revived by youthful new leader David Cameron, ahead by several percentage points. Labour figures worry that the furor over when Blair will leave is causing them irreparable damage (see BusinessWeek.com, 1/11/06, "Will Britain Go Conservative?").

TAX DISTRESS. For business, the legacy of the Blair era has been mixed. When Labour returned to office in 1997 after almost two decades of Tory rule, Brown and Blair scored major points with business by giving the Bank of England power to set interest rates. The move contributed to a long run of steady if unspectacular economic growth that outpaced the other major European economies and slashed unemployment. In their first term they also kept tight reins on public spending.

But during the next two terms, Brown, who used to enjoy the sobriquet "Iron Chancellor," has turned into a big spender, making Britain one of the few countries in the industrialized world to buck the tax-cutting trend of recent years. "I used to give Brown quite good marks, but since the millennium he has spent money like water and made the tax system horrendously complicated," says Ruth Lea, director of the Centre for Policy Studies, a pro-business think tank in London.

The tax rises have not been huge, but they have created unease in business circles. According to Christine Frayne, a senior research economist at the Institute for Fiscal Studies, a London think tank, taxes have risen from 34.8% of GDP at the time of Labour's election to 38% at present, as Brown and Blair have ramped up spending for public services such as health and education (see BusinessWeek.com, 4/18/05, "Britain: If the Economy Ain't Broke").

BUSINESS' BURDEN. What bothers many people, including Derek Scott, Blair's economic adviser from 1997-2003, is that Brown and Blair were never willing to take the reform steps needed to hold down such costs because they got a free ride from benign economic conditions. "The real problem, whether Blair or Brown is Prime Minister, is that we have to slow down public spending," Scott says. "But up until now, they haven't had to make any difficult decisions."

Brown's penchant for adding complex wrinkles intended to do everything from encouraging entrepreneurship to lifting children of poor families out of poverty also rankles business. The growing complexity of the tax regime, as well as increasingly aggressive collection efforts, has contributed to a sense in some circles that Britain is losing some appeal to companies. "I think the perception that [Britain] is a difficult or expensive place to do business is a growing theme," says Michael Hughes, chief investment officer at Baring Asset Management in London. "Part of this has to do with the complexity of taxation and the supply-side microreforms."

Hughes thinks that Brown's elevation to the premiership might actually be a plus because he would no longer be in direct charge of fiscal policy at the Treasury. Aware of business complaints, a new Chancellor might adopt a fresh approach. But it seems more likely that Brown would continue to exercise much more sway over economic policy than Blair ever did.

HECKUVA JOB, BROWNIE? Still, Brown probably would make his first moves in areas such as foreign policy, rather than in economics. If he is going to beat Cameron in the next election, he badly needs to distinguish himself from Blair, whose government has been discredited on a number of counts, including taking Britain into the Iraq War on the basis of doctored intelligence. Other scandals, such as the claim that knighthoods and other honors were traded for political contributions, have further tarnished Blair's once squeaky-clean image.

While Brown probably hasn't yet decided whether to pull British troops out of Iraq and Afghanistan, he is almost certain to put some distance between himself and President George W. Bush. The perception among many Britons that Blair has been willing to subordinate Britain's interests to America's has been very damaging to him (see BusinessWeek.com, 7/13/06, "Handcuffs Across the Water").

In addition, it will be incumbent on the next Prime Minister to open a dialogue with the U.S. Democratic Party, which now has a real chance of regaining the White House. "With only two years before the next presidential election, Brown will want to reposition himself against Bush and for dealing with the Democrats," says Peter Kellner, chairman of pollster YouGov. "But whether that will be a matter of rhetoric or of policy is probably not yet decided." First, Blair has to step aside.


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