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Last Updated: Thursday, 28 June 2007, 11:03 GMT 12:03 UK
The challenges for the chancellor
By Steve Schifferes
Economics reporter, BBC News

Alistair Darling
The new chancellor is a close ally of Mr Brown

Gordon Brown once said that there are two kinds of chancellors: those who wait too long and those who get out in time.

After 10 years, Mr Brown is leaving the Treasury with his reputation as the iron chancellor largely intact.

But his successor, Alistair Darling, will face a series of challenges that could threaten Labour's record of economic competence.

Stable growth

So far, the UK economy has enjoyed a remarkable period of stable growth, low inflation and low interest rates.

But interest rates have already been raised four times by the Bank of England (BoE) in the past year, and some analysts expect rates to reach 6% by the end of the year.

The BoE has indicated that rates may have to rise to combat the growing inflationary pressures in the economy, and perhaps to curb the boom in house prices.

Gordon Brown's record as Chancellor over ten years

And global pressures for higher interest rates are rising around the world, as investors reconsider whether their view of risk has been too optimistic.

These rate rises could slow the economy and complicate the new chancellor's task in balancing the budget.

And, in the short term, they could also make life uncomfortable for many people who have borrowed heavily when rates were low, and make it more difficult for the government to help those who are unable to get on the housing ladder.

The high level of personal debt - now more than one trillion pounds - held by individuals makes the situation fraught with difficulty.

Public spending

The new chancellor will also face a more difficult situation in regard to public spending.

His first task will be to sign off on the comprehensive spending review, which sets government spending targets for the next three years.

This was postponed until October by Mr Brown in order to allow the new administration to put its mark on the proposals.

But with a large budget deficit after years of expansion by Mr Brown, there is likely to be a difficult squeeze on departmental spending - especially outside of health and education.

There is little prospect that the government will be able to increase spending by raising taxes, as Mr Brown did when he increased national insurance a few years ago.

So Mr Darling will have to count on "fiscal drag" - the fact that economic growth drags more people into higher tax brackets - to help boost the Treasury's coffers.

Business taxation

In fact, there will be pressure from several quarters to reduce taxation.

The new "Business Council for Britain" that Mr Brown will be setting up is likely to recommend cuts in business taxation, and simplification of the existing system, in order to boost investment.

And sorting out the conundrum of local government taxation without further political damage is likely to require some additional help from the Exchequer.

Many of Mr Brown's tax schemes are widely seen as ineffective - but it would be a bold chancellor who unilaterally decided to unravel them.

Indeed, a key question is how much power Mr Brown is likely to cede to any chancellor, or whether he will still want to be running the show himself through his trusted deputies.

By appointing his long-standing ally, Alistair Darling, as chancellor, he will haved smoothed the path of a relationship which - when Mr Brown was chancellor and Mr Blair Prime Minister - was often fraught with tension.

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