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Last Updated: Wednesday, 16 March, 2005, 14:26 GMT
Budget deficit limits give-aways
The economic battle Gordon Brown is facing

Gordon Brown sang the praises of Labour's management of the economy while announcing a modest boost in spending for pensioners and motorists.

He said the UK was the most stable of all the major economies, and maintained his forecast for economic growth of 3-3.5% in 2005 and 2.5-3% in 2006.

Since Labour came to power, inflation has averaged 2.4% while interest rates have averaged 5.3%, the chancellor said

And he defied critics who warned of a "black hole" in public finances.

Mr Brown said he would meet his own fiscal rules this year by a margin of 6bn, and that there would be a surplus on the current budget by 2006-7.

% of GDP
2003/4: 3.2%
2004/5: 2.9%
2005/6: 2.6%
2006/7: 2.2%
2007/8: 2.0%
2008/9: 1.6%
2009/10: 1.5%
source: Budget 2005 Table C4
public sector net borrowing

And he claimed that the Budget represented overall a "modest fiscal tightening".

"It is right to choose the prudent course for Britain," he said.

The Budget documents show that Mr Brown has balanced his extra spending commitments by abolishing stamp duty relief for commercial property in deprived areas and bringing forward the payment of corporation taxes by oil companies.

These moves will help reduce his budget deficit for one year only.

Economists warned that Mr Brown may still find it difficult to meet the fiscal rules he has set himself.

"If growth doesn't come in as the Treasury forecast, then the golden rule won't be met in the next fiscal year," said Gavin Redknap, an economist at Standard Chartered.

More spending?

Mr Brown announced a further increase in funding for education from 2008-9 - going beyond the spending figures announced last summer.

"We have made our choice - affordable tax cuts and essential spending increases," he told the House of Commons.

North Sea oil tax: 1,100m Commercial property: 340m Less tax avoidance: 660m
Source: Budget 2005, Table A1

Tory leader Michael Howard said that the government was planning an additional 168bn in borrowing over the next five years, and that the only question was which taxes would have to rise - the equivalent of 3p in the pound.

However, Robert Chote, director of the independent Institute for Fiscal Studies, told the BBC that this was not a "give-away budget".

Pensioner tax help: 800m
More for Iraq: 400m
Stamp duty threshold: 250m
Freeze on fuel duties: 235m
Source: Budget 2005, Table A1

He said that the chancellor had far less scope for generous new measures now than before the 2001 election and feared the need for tax increases in the next economic cycle.

Other economists are also sceptical.

"Significant tax hikes or cutbacks to public spending are likely to feature early on the agenda for whoever is in power after the imminent general election," said Howard Archer, chief UK economist at Global Insight.

Economic growth worries

The UK economy grew by 3.1% in 2004, consistent with the chancellor's forecast.

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Independent forecasters, however, believe that the rate of economic growth will slow to 2.6% in 2005 and 2.3% in 2006 - closer to the long-term potential of the economy.

And the Bank of England is worried that a sustained period of economic growth above 3% could stoke inflationary pressures - a view disputed by the Treasury.

Such pressures could come through in demands for higher wages, especially if public sector employment continues to expand, possibly creating competition with private firms for new workers.

Average earnings rose by 4.4% last month - close to the 4.5% level that normally triggers concern.

Some forecasters are predicting that the Bank of England could raise interest rates as early as May - just after the expected date of the General Election.

Golden rule

The chancellor has staked his reputation on fiscal responsibility which is, he argues, one of the key reasons why Britain has escaped the "boom-bust" cycle of previous governments.

The 'rule', introduced by Chancellor Brown, governs how much the government can borrow, and for what purpose
It means the government should borrow only to fund investment, and not day-to-day - or 'current' - spending
The policy's success is measured by whether surpluses and deficits can be balanced over a full economic cycle
The current economic cycle is expected to end in 2006

The most important one is the so-called "golden rule" which says that the government should not borrow to fund current spending - but it is applied not just in one year, but over the economic cycle as a whole.

However, over the past few years, the chancellor has made some adjustments to how he calculates the golden rule, giving him some extra room for manoeuvre.

Earlier this month, the Office for National Statistics reclassified 3bn worth of road repairs as investment rather than current spending.

Analysis of how Brown could balance his Budget


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