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Thursday, 9 November, 2000, 19:59 GMT
Does the pre-Budget report add up?
Gordon Brown delivering his pre-Budget statement
Gordon Brown has done the sums - but can he make both the voters and the financial markets happy?
UK Chancellor Gordon Brown plans to give away about 10bn over the next two years, in a raft of tax cuts and extra spending. But where does that leave the public finances? BBC economics reporter Jenny Scott has been adding up the numbers.

Gordon Brown is in the enviable position of having far more money than he thought he would. A flourishing economy has generated more tax receipts than anticipated, and government departments have found themselves in the unusual position of having to spend less than they are allowed to.

That means the Chancellor has 4bn more to play with next year than he thought he would. He plans to give away 3bn of that in tax cuts and spending increases during 2001/02 - leaving him with 1bn extra in the kitty.

In other words, the public surplus next year is now expected to be 6bn, rather than 5bn.

However, that surplus will turn into a deficit the following year, and by 2004/05, the government expects to borrow 12bn to pay for its largesse.

In addition, the government's contingency fund, a pool of cash set aside for emergencies, will probably be used up paying for the planned cuts in tax on ultra-low sulphur fuel. These are yet to be accounted for in the Treasury's arithmetic as, strictly speaking, they are still under consultation.

Therefore, at first glance, it would seem that the Chancellor has spent all he can, leaving him little in the way of a war chest to finance a pre-election give-away.

More tax cuts

Fuel protester
Fuel protesters have forced the government to act
However, many economists are predicting that by next March he will have found enough money to afford cutting income tax by at least one penny in each pound taxed.

And his 2001 budget could the Chancellor's last chance to impress the voters before what is widely anticipated to be a May general election.

Where might the money come from?

There are three potential sources: A government spending undershoot, a better than expected performance from the economy and the current budget surplus.

Slow to spend

Ciaran Barr, chief UK economist at Deutsche Bank in London, expects government departments to spend around 5bn less this year than they are supposed to.

In other words, spending on things like school text books, nurses and teachers is likely to be less than the government wants, and has allowed for -- particularly judging from the slower than expected rate of spending in the first part of the financial year

"Even adjusting for lower unemployment, Labour has undershot its already tight spending plans in two out of the three fiscal years they've been in power," he said. "It's proving very difficult for the public sector to adjust from famine to feast."

That may give the Chancellor some room for manoeuvre in terms of tax cuts.

Budget surplus

He could also plunder the current budget surplus.

This is expected to be in the black to the tune of around 1.5% of gross domestic product in 2000/01, with that figure falling to 1.4%, 1.1% and 0.6% in the years ahead.

One of Mr Brown's two self-imposed rules concerning the public finances is that the current budget must be in balance over the course of the economic cycle. In other words, the government is not allowed to land itself in debt to pay for things like doctors' salaries and NHS bandages.

However, there is nothing to say the current budget must be in surplus - hence the hefty positive balances expected over the coming years could theoretically be raided to pay for tax cuts. However, the Chancellor may be reluctant to do this, given his penchant for prudence.

Strong economy

The third potential source of extra money for the government is the economy.

The budget's sums are based on the assumption that growth will trot along at 2.25% from next year - the so-called

trend. If the economy manages to clock up growth just a quarter of a percent more than that - which is perfectly plausible - that would give the Treasury an extra 1.5bn in the first year and an extra 3bn in the second, according to estimates from the independent think tank, the Institute for Fiscal Studies.

Given a possible underspend of government money, a better economic performance and the burgeoning current budget, the Chancellor could be in a position to dole out popular income tax cuts next March. That would certainly go down well with the Prime Minister, even if it sits awkwardly with Mr Brown's prudent instincts.

"The pressure will remain on Mr Brown, especially from his boss," said Mr Barr. "Tony Blair will want a pre-election tax cut that is easy to understand."

A one penny cut in tax would cost about 3bn pounds - but if it wins the government a second term in office, Labour may consider it money well spent.

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