What is the pre-Budget report?

Published each autumn, the pre-budget report is the Treasury's chance to explain in advance the measures likely to be presented in the full budget the following spring, and to update its economic and budget forecasts.

When Chancellor Gordon Brown introduced the idea of a pre-budget statement in 1997, he heralded it as a measure that would add predictability and stability to government, while reducing uncertainty for business and the markets.

Increasingly, however, it has been used as an opportunity to launch new policy initiatives and to make the odd political concession where deemed necessary.

With a general election expected in 2005, this year's pre-budget report will be the first draft of the government's plans for the future direction of public spending, which will be spelled out further in the March 2004 budget and the July 2004 spending review.

New policies

In previous years, major new policies such as the minimum income guarantee for pensioners, concessions on fuel duties, and the 10p starting rate of income tax were first revealed by Mr Brown in the pre-Budget report.

The report effectively marks a new twist to the old autumn statement beloved of chancellors in years gone by, when governments announced in advance their spending plans for the next year.

That was abolished by the last Conservative chancellor, Ken Clarke, who sought to combine the Budget and the autumn spending statement in a single presentation to Parliament.

But unlike the earlier autumn statement, the PBR is less about public spending (which is now supposed to be decided in the Comprehensive Spending Review every two years) and more about the future direction of tax policy.

This year, the Chancellor will confirm a new inflation target for the Bank of England which will bring the UK in line in European practice.

In the future, the Bank will be told to measure inflation according to the harmonized index of consumer prices (HICP), rather than RPIX, which will result in a lower inflation rate for the UK - and a revised target of 2% rather than 2.5%, the same target used by the European Central Bank.

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Budget deficit grows

This year there will a greater focus on the long-term question of taxes and spending, as the huge budget surpluses enjoyed by the government in the first few years in power are rapidly disappearing and being replaced by rising deficits.

The UK's economy has escaped the worst of the world economic slowdown and now appears on the road the recovery, confounding the Chancellor's critics who argued that his economic forecast, for growth of between 2% and 2.5% this year was far too optimistic.

But the government's budget deficit is rising fast, and the public sector net cash requirement (PSNCR) is now projected at £44bn, compared to the Chancellor's forecast of £27bn in the April Budget.

Under the government's spending rules, it can borrow money now and set it against the earlier surpluses (the golden rule which says it should balance its budget over the economic cycle as a whole.)

But the net surplus is set to fall from £100bn accumulated in the years of surplus to just £30bn after the next few years of deficit.

The Chancellor will want to guard his reputation for prudence, and the indications are that to curb the budget deficit, he will insist on a tight spending round in the summer.

It is likely that after meeting the government's commitments on health and education, other departments will be told that there will be no real increase in their budgets over the next two years.

We are already this year paying a big tax increase, a 1% rise in National Insurance contributions, which came into force on1 April 2003, to help pay for this increased spending on health and education.

And Gordon Brown will be hoping to avoid any other big tax increases ahead of the General Election.

Tackling housing

One of the key issues that will be confronted in this year's pre-Budget report is the house price boom.

Two major reports on the housing market are set to be released by the Chancellor at the same time as the PBR

The Miles report will look at why Britain has not adopted long-term fixed rate mortgages, and whether moving to such a system would provide greater stability to the housing market.

And the Barker report will examine why the building industry has not been producing more houses, increasing supply to respond to the greater demand for housing that has been driving up prices.

It is expected to recommend improvements to the planning system, and possibly a tax on development land that is being held back in reserve.