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Last Updated: Wednesday, 6 December 2006, 16:07 GMT
Revenue gloom forces Brown's hand
By Evan Davis
Economics editor, BBC News

Gordon Brown
The latest pre-Budget report was Mr Brown's 10th

For the chancellor, this was perhaps a slightly tougher pre-Budget statement to make than expected.

Yet again, Gordon Brown has to had to tell us there is less tax revenue coming in than he had forecast.

That's the ninth budget or pre-Budget in a row that this has happened.

The only difference to the previous eight is that this time, few of us had expected him to have to break bad news.

It turns out, though, that 3bn worth of revenues expected from North Sea oil are not there. That's three billion the chancellor couldn't afford to lose.

As a result of that, Mr Brown has had to make a modest tax increase. The overall net tax rise is 2bn a year.

There was no room in his books to raise green taxes and hand the money back in other tax cuts. Raising revenue was the order of the day.

So, despite the tax rise, and an economy growing faster than expected, and a new assumption that it will carry on growing faster in future years, borrowing is higher than the chancellor had expected.

Gordon Brown will meet his golden rule over his probably 10 years as chancellor. But he will hand over a deficit to his successor - not a surplus, as he had hoped back in the Budget.

Small headache

Perhaps the most significant consequence of the tight finances will be for public spending.

That has been growing at about 4% above inflation this decade. But in the period of the next spending review, it is set to grow at less than 2% a year. That will feel very tight.

And there is no light at the end of the tunnel for the public sector. Right through to 2012, Gordon Brown is assuming public spending shrinks as a proportion of national income.

It seems that on a small scale, the Chancellor has fallen prey to some of the very problems he has tried to avoid: spending too much and then having to rein back.

Indeed, the story of the last few years for Gordon Brown is that he raised government spending in different spending reviews, expecting tax revenues to be sufficient to pay for it all. But tax revenues have been disappointing.

As a result, he has been borrowing more than he wanted. To solve that problem, aside from the odd small tax rise like that announced in this speech, he is letting economic growth deliver higher tax revenues over the next few years, while holding public spending back.

And he hopes that by the end of the decade, with that strategy in place, the books will be in a comfortable position again.

It's not a crisis for the Chancellor. If there has been a black hole in the books, it has been relatively small. But it is a headache, for whoever is running the country next year and beyond.

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