VZCZCXRO1542
PP RUEHAG RUEHROV
DE RUEHLO #1947/01 1411347
ZNY CCCCC ZZH
P 211347Z MAY 07
FM AMEMBASSY LONDON
TO RUEHC/SECSTATE WASHDC PRIORITY 3584
INFO RUCNMEM/EU MEMBER STATES COLLECTIVE PRIORITY

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) 
 
------------------- 
SUMMARY AND COMMENT 
------------------- 
 
¶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). 
 
--------------------------------- 
A Stable Macroeconomic Foundation 
--------------------------------- 
 
¶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 
 
LONDON 00001947  002 OF 003 
 
 
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). 
 
--------------------------------------------- ---------- 
Britain's Answer to Globalization: Education and Skills 
--------------------------------------------- ---------- 
 
¶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). 
 
--------------------------------------- 
From Debt Relief and Aid to Empowerment 
--------------------------------------- 
 
¶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 
 
LONDON 00001947  003 OF 003 
 
 
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). 
 
-------------------------------- 
The Third Pillar: Climate Change 
-------------------------------- 
 
¶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. 
 
Visit London's Classified Website: 
http://www.state.sgov.gov/p/eur/london/index. cfm 
TUTTLE