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Wednesday, 8 November, 2000, 18:42 GMT
The 'prudent' economic approach
Chancellor Gordon Brown stressed a prudent approach for the spending plans outlined in his pre-Budget statement, pledging not to "put at risk economic stability".

He announced 4bn worth of concessions, including fuel duty reductions and increases in pensions, but balanced it with projections of another 5bn in tax revenues and savings.

The cornerstones of his budget policies, however, are good economic fundamentals.

The UK economy is in its ninth successive year of expansion and now recovering strongly after a brief period of weak growth in the aftermath of the global financial crisis in the late 1990s.

Tax revenues and his spending limits will be governed by future economic growth, and Mr Brown predicted gross domestic product (GDP) would grow by 3% this year. In his March budget he had forecast growth of 2.75% to 3.25%.

His predictions for growth in 2001 are unchanged as well, at 2.25 to 2.75% - despite high oil prices and a weak euro clobbering UK industry.

Mr Brown gets extra help with unemployment at a 20-year low, and inflation well below the government target of 2.5% - which he predicts to stay on target in 2001, despite the 43bn spending splurge over three years announced in this summer's Comprehensive Spending Review.

Budget surplus


It's not obvious that the Chancellor has gone on a spending spree and so to that extent it seems unlikely that there's any pressure on the Bank of England to raise interest rates over the coming months

Mark Miller, Morgan Stanley Dean Witter
The predicted strong economic growth will translate into higher tax receipts. Together with windfall income from the auction of third generation mobile phone licences, it has presented Mr Brown with that rare beast, a budget in surplus.

This year, the surplus is expected to weigh in at 16.6bn - 2.6bn more than forecast in March.

In the coming four years, the surplus is expected to come in at 16bn, 14bn, 8bn and 8bn - not much change on previous forecasts.

More important, though, are the Chancellor's figures for the government's net borrowing requirement - although with the surplus its payback time. Instead of the predicted 6.5bn the Treasury will cut debt by 10bn this year and by 6bn in 2001.

And even once the massive spending programmes announced in the summer kick in, deficits will be just 1bn in 2002, and 10bn, 12bn and 13bn in the following years. Mr Brown bills those fresh deficits as "borrowing to invest".

Some of the money will go on the government's favourite issues - health, education, transport, pensioners and - since recently - fuel.

The rest will go into debt repayments, and Mr Brown predicts to cut government debt as a share of national income to 32.3% at the end of this year and about 30% in future years. These figures are well below his predictions this March - before the windfall income from the mobile phone auction - and compares with a debt ratio of 44% when Labour came to power.

Using the surplus to repay government debt will free up 2.5bn next year alone, and according to Mr Brown such "prudent" spending will finally put an end to years of "boom and bust".

Spending restraint

At the end of the day, this still leaves Mr Brown, with a lot more money to spend than the measures announced on Wednesday, which are worth about 4bn.

But the chancellor is in a bind. Higher spending or larger tax cuts could overheat the economy and are certain to boost inflation, a point highlighted on Tuesday in a speech by the governor of the Bank of England, Eddie George.

Higher inflation would not only drive up his own costs to repay government debt, but would deeply upset millions of mortgage holders across the country.

Economists said Mr Brown's pre-Budget statement provided little to give the Bank of England any reason to raise its interest rates.

Trying to dampen all demands for extra spending programmes, Mr Brown pledged to adhere to a "low inflation culture" where all citizens [are] sharing in rising prosperity".

Another consideration for the chancellor is that he wants to have some room for manoeuvre for his next budget in March 2001. If the pundits are right, next summer could see a general election, and Mr Brown is certain to keep back some vote-getters for a pre-election budget.

Productivity gap

A constant refrain during recent budget statements has been the Chancellor's demand to improve the productivity of UK industry, which is lagging that of key rivals like the United States, France, Germany and Japan.

So far, however, Mr Brown has tried to close the gap not through massive reforms, but through a raft of narrowly targeted measures. Critics speak of microeconomic tinkering.

This pre-Budget statement was not any different. New measures designed to "encourage entrepreneurship and expand investment" include:

  • Abolition of the withholding tax on international bonds and all payments of interest and royalties between companies in the UK
  • Reduce tax on sales of substantial shareholdings by companies
  • Make mergers and takeovers easier by reducing the tax burden on intellectual property and goodwill.
  • Consult small businesses on proposals to simplify the VAT system
  • Examine proposals for an extension of tax credits for Research and Development
  • Encourage start-up companies - especially in the world of e-commerce - by expanding tax relief for share options, up to a company limit of 2.5m worth of share options.
  • Cut the capital gains tax from 40p to 10p for non-trading and venture capital companies - in line with a similar tax cut for other firms.
  • Consultation on plans for further business rate relief for small business in assisted areas, a tax credit for community investment and the creation of the a Community Development Venture Fund.

The analysts' take

Claudio Piron of Standard Chartered bank said Mr Brown had maintained "a pretty much prudent strategy".

He said the measures to help "small to medium enterprises and manufacturing will be welcome", but added that overall the Chancellor had "given very little away in spending".

Mark Miller of Morgan Stanley Dean Witter said the chancellor had not "gone on a spending spree and so to that extent it seems unlikely that there's any pressure on the Bank of England to raise interest rates over the coming months."


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