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Last Updated: Wednesday, 10 December, 2003, 13:59 GMT
Analysis: The budget shortfall
By Steve Schifferes
BBC News Online economics reporter

The Chancellor has admitted that the government budget deficit will be 10bn larger than he previously thought.

He also said that the economy is on course to grow at 2.1% this year, and 3% to 3.5% in the next two years.

Some predict that taxes will have to rise to meet the growing budget gap.

But Gordon Brown claims to be on target to meet his own "golden rule," which says the government should not borrow for current spending over the whole economic cycle.

Golden rule

Mr Brown has admitted that this year the government will borrow 37bn, 10bn more than predicted in the Budget, and will be 7bn more than expected in 2004/5.

BUDGET DEFICIT FORECAST ( Budget forecast in April)
2003/4: 37bn (27bn)
2004/5: 31bn ((24bn)
2005/6: 27bn (23bn)
And his own preferred measure, the current budget deficit, which excludes spending on investment, will be 19bn this year, 11bn worse than expected.

But he says that the UK's budget deficit, although it will breach the Maastricht limits of 3% this year, will be lower than the deficits in other major economies such as Germany, the USA, and Japan.

Mr Brown built up huge surpluses in the early years of the Labour government, which he is now offsetting against the growing budget deficit.

But the total size of those cumulative surpluses is falling rapidly as each year's budget deficit mounts, from nearly 100bn to around 20bn.

Mr Brown now says that he will meet his overall target with only 14bn to spare, a relatively narrow margin of 0.2% of GDP.

But some economists accuse Mr Brown of "moving the goalposts," and changing the year the economic cycle began to 1997/98, instead of 1999.

Geoffrey Dicks, an economist with RBS Financial Markets, says that without that change, Mr Brown would meet his budget rule with only 4bn to spare.

UK: 3.4% of GDP
Germany: 4.2% of GDP
France: 4.2% of GDP
USA: 4.9% of GDP
Japan: 7.4% of GDP
2003 financial years
And there is also controversy over when the economic cycle will end.

The government predicts that it will be in 2005/6, which would give Mr Brown time to get declining surpluses to get back into balance.

But if that turns out to be incorrect, or tax revenues continue to fall, then the golden rule could be breached.

The Chancellor is in denial
Peter Spencer, chief economist, ITEM Club
There are also questions over his decision to exclude all spending for investment from the calculations over the budget deficit.

Some economists worry that Mr Brown has fudged his definition to further flatter the figures.

"The Chancellor is in denial," said Peter Spencer, chief economist for the ITEM Club/Ernst and Young forecasting model.

Economic growth

Mr Brown has been confounded his critics over economic growth, however.

He was widely derided when he predicted that the economy would grow by 2% to 2.5% this year, and by 3% to 3.5% in 2004 and 2005.

Now it appears that he was broadly correct about economic growth this year, which he expects to be 2.1%.

Mr Brown says that Britain has been enjoying the longest period of continuous growth since records began.

Mr Brown has maintained his optimistic forecast of stronger growth in the next two years.

However, the Chancellor has consistently raised his economic forecast in future years to compensate for shortfalls in current years.

Many economists still think his forecasts for 2004 are over-optimistic.

Stephen Lewis, an economist with Monument Securities, says that "unless we get a lot of help from the global economy it's not likely to happen."

If there is stronger economic growth, it will generate higher tax revenues, and help keep the budget deficit in check in future years.

Public spending pressures

It will also help fund his new initiatives, such as the 1bn needed to fund his new child tax credits and other initiatives.

And he said that the costs of the war against terror, including the cost of keeping British troops in Iraq, would increase by 800m to 6.3bn.

The chancellor warned that the next spending round, when government departments bid for extra funding in the future, will be tough.

And buried in his forecast, there is a modest cut of 0.1% penciled in for total departmental budgets, compared to forecast, for 2005/6.

With the government reluctant to raise taxes ahead of a General Election, it may well be that a spending freeze in departments other than health and education will turn out to be the chancellor's preferred method of bridging the budget gap.

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