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Last Updated: Tuesday, 6 December 2005, 23:30 GMT
The return of the Iron Chancellor
Analysis
By Steve Schifferes
BBC News economics reporter

Chancellor Gordon Brown
Is the iron chancellor losing his grip on public spending?
The chancellor looks like bridging the black hole in the public finances by spending cuts rather than tax rises.

According to the respected think-tank the Institute of Fiscal Studies, Gordon Brown has pencilled in 8bn in spending cuts as well as 3bn in tax rises.

The new strategy, if confirmed in the spending review covering the three years to 2011, would mean real pain.

And it signals the end of the era of rapid expansion of public spending on essential services funded by tax rises.

Moving the goalposts

Analysing the chancellor's pre-Budget report, the IFS says Mr Brown has accepted many of the criticisms that his figures were too optimistic, and has admitted that the public finances are in worse shape than he realised at the time of the Budget just seven months ago.

The goalposts have been moved so far that they are barely still on the pitch
Robert Chote, Institute for Fiscal Studies

But IFS Director Robert Chote said that Mr Brown had only met his own fiscal rule - that says the budget should balance over the economic cycle as a whole - by changing his definition of the economic cycle.

"Gordon Brown extended the seven-year economic cycle to 12 years - less a cycle than a stretch limo," he said. "The goalposts have been moved so far that they are barely still on the pitch."

According to the IFS, the government - which said on 19 July that it would meet its golden rule regardless the change in the definition of the cycle - had now admitted that it would have been 2.4bn adrift.

And the IFS says that extending the economic cycle forward to 2009 gives the Chancellor extra room in the future - and ensures that we will only know if the Chancellor has met his rule after the 2009 general election.

Going into reverse

Unlike the budget, which was broadly neutral, this PBR raised money from the corporate sector and gave some of it away to the public.

PRE-BUDGET REPORT IN FULL

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The increase in taxes on North Sea oil will raise more than 2bn per year, while tightening up tax avoidance and raising the tax rate for small companies could add around another 1bn per year.

Motorists have gained about 600m by the postponement of any fuel duty increase this year, while pensioners have gained a similar amount by the extension of the 200 winter fuel allowance for the remainder of this parliament.

Mr Brown is sticking to his already-announced spending plans until 2007, with spending growing by 3% per year.

But evidence of the squeeze on spending on taxes is contained in his future projections.

He expects income tax to raise an additional 11bn by 2010/11 in real terms, mainly because more people will pay higher rates of tax.

Spending pain

But he expects public spending to be 8bn lower by then, with below-trend growth in spending of just 1.8% for the three years from 2008.

The cuts are necessary to move the budget back into surplus and meet his fiscal rules in the future.

According to the IFS, many public spending departments could face little real growth at all in the future if other key commitments are to kept.

In particular, if spending on the National Health Service keeps rising (even by a reduced 4% a year, as suggested by the Wanless report) and the government also honours its commitment to raise aid to poor countries to 0.7% of GDP, then other departments will have to grow by less than 1% in the next spending round.

This could make it difficult for the government to meet its future aim of reducing child and pensioner poverty, the IFS said.

The tight spending round also at least partly explains Gordon Brown's reluctance to endorse the Turner Commission plans for pension reform, which the pre-Budget report estimates would cost 14bn by 2020.

If the Conservatives stick to their plans to link pensions to earnings, it could lead to the curious spectacle of Labour being the party of spending restraint at the next election.




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