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Tuesday, 16 July, 2002, 15:49 GMT 16:49 UK
Emptying the war-chest
Departmental budget graph

Gordon Brown's luck - and his fabled war chest of Treasury cash - is about to run out, a respected think tank has said.

The Institute for Fiscal Studies says that after the current round of spending increases, Mr Brown will have nothing left in the pot to give away ahead of the next General Election, expected in 2005.


(The Chancellor's) good fortune in finances may be coming to an end

Andre Dilnot, Director, IFS
And it warns that a further prolonged spell of economic downturn could put the public finances out of kilter by around 4bn.

IFS director Andrew Dilnot said that the period of "good fortune in finances and over-pessimism in growth [forecasts]" was coming to an end, making life "more difficult for the chancellor" as he reaches the limits of public borrowing allowed under his own rules.

Mr Dilnot said that if Mr Brown had been over-optimistic in increasing the trend rate of growth for the economy, every 0.25% reduction in the growth rate would increase the public sector deficit by around 1bn each year.

Front-loading the budgets

On Monday, Mr Brown announced a 90bn increase in public spending over the next three years, the largest boost, on a percentage basis, since the 1970s.

Spending by government departments will rise by 60bn to 300bn, a 5.3% yearly increase in real terms.

Health and education do particularly well, with an annual increase of 7.3% for the NHS, guaranteed until 2008, and 5.8% for schools.

But, with the exception of two smaller departments - International Development and Transport - most departments won below-average increases - including the Home Office, despite a furious battle between Mr Brown and Home Secretary David Blunkett.

And some departments get most of the money in the first year, leaving relatively little for the period just before the expected election.

The budget for agriculture and rural affairs, for example, is forecast to shrink by 1.8% in the final two years of the spending period.

Cash for transport is expected to be static after a sharp increase in the first years to fund the London Underground's public-private partnership deal.

In past spending rounds, the chancellor has usually increased spending as an election approached.

This time round, that would be difficult without raising taxes again.

Attacking poverty

The Institute of Fiscal Studies also points out that Mr Brown may have understated his desire to raise spending on social security to help tackle poverty.

The spending plans allow for an increase in tax credits in the next financial year of 13%, to fund his child tax credits.

But Mr Brown then expects "annual managed spending" (which also includes debt payments) to rise by only 2.1% each year, well below the rate of growth of earnings and well below its historical average.

Reaching his target of cutting child poverty in half by 2010 may require more spending - and his plans would also be thrown off course if unemployment were to rise sharply.

The additional spending could push the chancellor to the limits of the borrowing allowed under his fiscal rules, which require him to borrow money only for investment over the economic cycle.

Measuring success

The IFS points out that UK public spending will still remain below the EU average of 43% of total economic output despite the current increases.

And it says that the targets for measuring success are still ambiguous and unclear, as are the sanctions for failure.

And underspending is still a problem, made worse by the fact that departments are allowed to roll forward any money underspent to the following year's budget.

If the government is to meet its aspirations to deliver world class public services, both more reforms and more money may be needed.

The government's plans for future spending are published on 15 July

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