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Last Updated: Wednesday, 17 March, 2004, 14:37 GMT
Chancellor shrugs off Budget gap
By Steve Schifferes
BBC News Online economics reporter

Cash register
The booming economy has not put enough in the Chancellor's coffers
Gordon Brown has claimed credit for the buoyant state of the UK economy, and said he will meet his fiscal rules without having to cut spending despite the large Budget deficit.

The chancellor heralded the robust UK economy in his Budget speech, saying that overall growth has been twice that of the eurozone and that Britain was enjoying the longest period of sustained economic growth for more than 200 years.

He said that the UK grew by 2.3% in 2003 - as he forecast, to much scepticism, in last year's Budget - and claimed that in the UK it would grow by 3% to 3.5% in 2004 and 2005, before returning to trend growth of 2.5% to 3.0%.

DEBT PREDICTIONS
2003/04: 37bn (up 10bn)
2004/05: 33bn (up 9bn)
2005/06: 31bn (up 8bn)
2006/7: 27bn (up 5bn)
Figures show Mr Brown's current predictions compared with his forecasts in April 2003

These projections are unchanged from December's pre-Budget report.

Inflation would stay below 2%, he predicted, using the new Consumer Price Index he introduced last year.

And Mr Brown said that public sector reforms were on course, that British industry should rise to the challenge of world economic growth.

Meeting the fiscal rules

Belying the healthy growth of the UK economy is a worrying deterioration in the public finances.

A guide to the ups and downs of the UK economy

For the last two years the Treasury has been grossly underestimating how much it is having to borrow to meet its public spending commitments.

In the April 2003 Budget, the chancellor predicted a Budget deficit (public sector net borrowing) for this year of 27bn.

But in the December 2003 pre-Budget report - just seven months later - the figure had gone up by an astonishing 10bn to 37bn.

However, Mr Brown said he is on track to meet his own fiscal rules - especially the "golden rule" which requires the Budget to balance over the economic cycle as a whole - by some 11bn.

And he said that future deficits would fall, allowing him to meet the golden rule in the future as well.

But he admitted that this year the UK would have to borrow 3.4% of GDP this year - breaching the Maastricht criteria set by the European Union.

Mr Brown said public borrowing would grow in future years faster than previously predicted, with borrowing in 2004-5 at 33bn, compared his previous forecast of 31bn.

Spending squeeze?

Many experts are sceptical about the chancellor's forecast for tax revenues next year, and forecast a Budget spending squeeze.

Mr Brown has left his forecast for spending unchanged over the next three years in overall terms - which means a slowdown in the rate of growth of spending outside of health.

But he said savings in government spending, on areas such as unemployment and debt interest, will release an extra 20bn in 2005-6 and 40bn in 2006-7 to go to front-line services, with 8.5bn more for education.

There may still be battles with other spending departments, however, ahead of July's Comprehensive Spending Review.

The Conservatives, who have announced plans for a sharp slowdown in public spending (except for health and education), believe that Mr Brown will be forced to raise taxes in the next election.

That will be the economic battleground for some time to come.


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