The CAA has the power to call the bond in if it feels the company’s future is too uncertain.. Is Gordon Brown really prudent? Or is he a gambler? The Concise Oxford Dictionary says that someone who is prudent is “careful to avoid undesired consequences”. A gambler is someone who “chooses to play games of chance for money, especially for high stakes”. As always, the Chancellor will argue that he has always been careful to avoid undesired consequences His fiscal framework is a case in point. Over the course of the economic cycle, he will only borrow for capital spending purposes. He has also placed limits on the total amount of debt that he is prepared to have on the Government’s books.So far, it’s been relatively easy for the Chancellor to stick to these rules.

However, it’s increasingly looking as though some of this success is a matter of luck rather than pure good judgement.The windfall gains stemming from the sale of 3G telecoms licences – correctly used to pay off part of the national debt – were big only because the auction took place at the peak of the telecoms mania.The surge in income tax revenues over the past few years may have been partly the result of big bonuses and pay levels delivered as a result of the dot bubble, a process that has now come to a sticky end. The same argument also applies to corporate tax revenues (and, given that telecoms companies gave potential profits to the government by buying licences, corporate tax revenues will, in any case, be more depressed).Output across the economy more broadly has held up a lot better than in countries elsewhere in Europe but there is a danger that this story is very much based on the “never-never”, reflecting unsustainable household borrowing. Tax revenues may, therefore, not be sustained at current levels.More generally, the Chancellor’s reputation for prudence rests on assumptions that may turn out to be wrong and yet they are held with a conviction not justified on the basis of past experience. The Chancellor explicitly states that he knows, first, where we are within the economic cycle and, second, what the underlying long-term – or trend – rate of growth is.Specifically, he says that the output gap – the difference between actual output and the level of output that can be sustained over the longer term while maintaining price stability – was zero in 1999. More precisely (thereby lending a spurious sense of accuracy to the whole process), he suggests that the output gap was at zero in the third quarter of 2001. He also claims that the trend rate of growth is 2.75 per cent a year (prudence tells him that he should use 2.5 per cent as the basis for his fiscal plans, but that is nevertheless an upward revision from his earlier prudent 2.25 per cent estimate).These numbers may be right, but there is a good chance that they are not. A fine example of error comes from the OECD, an organisation that, in theory, should have a better chance of getting economic estimates right than politically motivated finance ministries.

The left-hand chart shows estimates of the output gap for the UK economy made by the OECD back in 1996 compared with those made by the OECD today In some cases, the differences are substantial. The point is obvious: pretending that we know exactly where we are within the economic cycle is dangerous. This is not prudence: it’s a straightforward gamble.Ultimately, prudence can only really be gauged with the benefit of hindsight. There are, however, a number of key questions that need to be raised now to gauge the likely success or otherwise of the Government’s fiscal plans.Question One: Is the fiscal process symmetrical in the light of surprises to economic growth?The issue here is the sustainability of government revenues within the context of the Chancellor’s fiscal framework. When growth has surprised on the upside, the Chancellor has typically assumed that the initial windfall gain raises the overall level of revenues on a permanent basis.

This year, however, when growth surprised on the downside, the Chancellor built in an automatic recovery in economic growth, and hence revenues, for 2003. A symmetrical approach would have left him having to revise down his revenue assumptions for the future.Question Two: Does the fiscal framework help to deliver a lasting improvement in productivity?This is a key question. By allowing the Government to borrow for capital spending purposes, the Chancellor is hoping that there will, eventually, be an impact on productivity.He needs this to happen for the simple reason that, in 10 years’ time, the population of working age will be shrinking (see right-hand chart). In normal circumstances, a prospectively ageing population should now be saving for that eventuality The Government can do its bit by running fiscal surpluses.