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Brown's Big Government is bad for our mortgages and bad for our economy

Shadow Chancellor Oliver Letwin asks why Gordon Brown is ignoring the Bank of England's warning that his spending spree is causing the economy to overheat.

In the countryside, there is a proverb about the weather: red sky at night, shepherds' delight; red sky in the morning, shepherds' warning.

In the last few weeks, we have had on two occasions a shepherd's warning from the Governor of the Bank of England. The Governor's language - as always with central bankers - was exquisitely subtle. But his message was clear. He was saying not only that the housing market has become overheated, but also that Mr Brown's spending spree is causing the economy as a whole to overheat.

The Governor's warning comes at a time when everybody who is honest with themselves admits that the state of our economy is beginning to be a cause for concern. When half the commentators and columnists are writing that there is a problem, and when the other half are writing that there is not a problem, you know there is a problem.

Of course, there is still growth, and people still have jobs and houses - so, on the surface, it looks all right. But too many of those jobs are in the public sector: last year, while private sector employment fell by 98,000, public sector employment rose by 162,000 . And too many of the jobs in the private sector depend on consumption that is being fuelled by the Chancellor's spending spree. When growth is being propped up by big public spending just before an election, you know you have a problem.

The output gap is close to zero in the view of almost everybody except the Treasury.

The Chancellor - according to the spirit if not the letter of his own rules - should be moving into current balance or even surplus, and is instead running a huge deficit.

The Bank of England is responding by raising interest rates over and over.

There is a problem.

And yet, all the indications are that, in a few days' time, the Chancellor will announce a spending review in which the big spending goes on, and in which all of his famed efficiency savings, if they materialise at all, will be plugged back into yet more government spending.

Why isn't the Chancellor heeding the Governor's warning?

A few days ago, I gave a speech which explained why neither the Chancellor nor the government as a whole can cut back in any meaningful way on the growth of public spending. They are caught in a culture of big government - a culture of regulation, initiatives, targets, specific grants, panels, boards and czars, inspectors, additional layers of government, bureaucrats and administrators, complex and intrusive taxation, widespread dependency on the state, restricted choices for the consumer, and disempowerment of the citizen.

When the public sector adds 88,000 people in the field of education over the last recorded year, and only 14,000 of them are teachers or classroom assistants , when the running costs of central government have gone up by 60% since 1997 and the Chancellor mis-predicts his own central administration overhead by £4 billion, then big government has truly got out of control .

But the Chancellor's current, highly inadvisable spending spree, and his cavalier disregard for the Governor's warnings are only part of the picture.

It is the long term economic damage caused by Mr Brown's big government that ought to concern us even more. This is the terrible price of the Chancellor's pride.

The golden economic legacy inherited by Mr Brown did not just consist of tightly controlled public spending, a vastly reduced bureaucracy, and a public sector current balance. It also, and more fundamentally, consisted of an economy much more vibrant and better placed to compete than at any time in Britain's recent history.

Taxes were low, regulation relatively light. Huge and profitable businesses had emerged from the ashes of failing nationalised industries. Britain's productivity growth rate was on a par with other major industrial competitors. Britain's household savings ratio was respectable by international standards. Britain was fourth in the international competitiveness league.

When Mr Brown came to office, Britain was a world-beating economy that had led the way in restructuring, liberalisation and renewed dynamism.

After seven years of Mr Brown's bigger and bigger government, we have more and more regulation - 15 new regulations per working day . After seven years of Mr Brown, we have 66 stealthy, intrusive and complex tax rises, the equivalent of £5,000 more in tax per household per year, and most of it imposed on business.

After seven years of Mr Brown's bigger and bigger government, making more and more effort to command and control the economy, the effects on the long-term strength of the economy have been dreadful:

· Britain has dropped from fourth to fifteenth in the international competitiveness league ;

· Britain has dropped out of the premier league: we have a growth rate which may be marginally better than the sclerotic Euro-economies, but which is the lowest amongst the American, Australian, New Zealand and Irish economies. Ireland now has a higher income per person than we do ;

· we have a stock market that has stagnated and under-performed all major markets, with the exception of Japan ;

· our productivity growth rate has dropped by a third ;

· we have the biggest trade deficit since the 17th century; and

· the household savings ratio has dropped by a third .

Seven years of Mr Brown. Seven years of bigger and bigger government. Seven years in which the vitality of the British economy has been increasingly smothered by blankets of regulation and tax and means-testing.

Is it really true that Mr Brown's polices are responsible for the increasing convergence of Britain with Euro-sclerosis?

Alas, it really is true.

When the CBI estimates that UK business costs are being driven up by about £15 billion a year under this Government and the British Chambers of Commerce estimate that the cost of new regulation under Labour has now reached £30 billion , when every business you talk to has a tale to tell about the effects of the Social Chapter and of domestic regulation on their flexibility and on their cost base, you know that at least part of the fall in our productivity growth rate has come from the government.

When you look at the comparisons between our tax, our regulation, our public sector and those of the most vibrant economies, you know that the fall from fourth to fifteenth in international competitiveness has come from the government. On OECD figures, the UK public sector now accounts for more than 42% of national output, making it the largest state sector in the Anglo-Saxon world.

When you look at these things and add to them the £5 billion a year raid on the pension funds which are such important investors in our equity markets, you know that a great part of the under-performance of our stock market has come from the government.

When you look at the huge growth of means-testing in retirement, when you consider that 54% of British pensioners now lose between 40 pence and 85 pence in the pound for each extra pound of savings income, and when you add to that the damage the government has done to the taxation of savings, you know that a great part of the decline in our domestic savings has come from the government.

These things, as much as the short-term spending spree that is overheating the housing market and the economy in general, are the products of Mr Brown's big government. They are the products of huge increases in public spending. They are the products of his puritanical faith in command and control.

What a sorry spectacle: to take a world beating economy, fourth in the league, to smother much of its vitality and to turn it, over just seven years, into a mediocre economy, fifteenth in the league.

Can we do something about all this? Can a Conservative government reverse these trends, re-invigorate the economy, move us back up the competitiveness league?

Most assuredly we can.

It won't be easy. It will require unremitting effort and huge political will.

It will mean changing the culture of government.

It will mean removing swathes of regulation instead of adding them.

It will mean letting hospitals and schools and local police forces run their own affairs, giving patients and parents and local electors the Right to Choose.

It will mean lifting millions of pensioners - a million of them in the first four years alone - out of dependency on means-tested benefits, by progressively increasing the basic state pension, and paying for that by abolishing most of the New Deal, which has been such an expensive failure.

It will mean sweeping away boards and panels and czars, targets and schemes and initiatives, specific grants and controls over local activity.

It will mean cutting away layer after layer of unnecessary government activity, and layer after layer of government bureaucracy. That is the purpose of the James Report: a Conservative government will take office with a more comprehensive plan for removing layers of bureaucratic activity than ever before in our nation's history.

A few months ago, Michael Howard and I committed a Conservative Government to reducing the Civil Service by 20% over five years through a total recruitment freeze.

Two days ago, the Shadow Health Secretary, Andrew Lansley, and I announced the next step - sweeping away the Strategic Health Authorities and reducing significantly the Primary Care Trusts. This measure, which the James Committee estimates will free £2billion a year for front-line healthcare, is the first instalment of the reductions in bureaucracy that will flow from the Right to Choose policy.

And today, as I speak, Michael Howard is announcing that our commitment to smaller government will mean abolishing the Best Value and Comprehensive Performance Assessment regimes, which are costing local government £1billion a year on unnecessary bureaucracy

These moves toward smaller government - and the many others like them that are to come from the James Report - will enable us, without affecting front-line services, to stick to our medium term expenditure strategy. This in turn will enable us progressively to reduce the proportion of GDP spent by the state, so that we can eliminate the structural current deficit, avoid Labour's third term tax rises, and progressively and sustainably reduce the burden of tax.

Our aim is to provide Britain with a smaller government that does less and does it better - a smaller government that can give Britain not only lower taxes and better services, but also the vibrant and competitive economy which alone can sustain first-class public services.

This is our vision. This is our strategy for the medium term and the long term. A smaller government, lower taxes, better services, a vibrant and competitive economy for Britain once again.

If the Chancellor shared that vision, he wouldn't have done the damage he has done to the foundations of the British economy. He would not have stored up the trouble for the future that he has stored up.

If the Chancellor shared that vision, he wouldn't need to worry about the Governor's warning: because he wouldn't have been using a bloated and enlarging bureaucracy to pump up spending in an overheated economy.

If the Chancellor had shared that vision, the Governor would never have needed to issue his warning in the first place.

But the Governor has issued his warning. And I say to the Chancellor today, even if you do not share our vision, even if you cannot see the long term damage your big government is doing to our economy and to our competitiveness, surely you can see that this spending review has to be a time when you heed the Governor's warning.

Surely you can see that you cannot sustain the level of spending you have programmed and the level of borrowing it entails.

Act now to stop it getting worse.

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