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banner Thursday, 1 March, 2001, 16:28 GMT
Strong finances boost Brown

by BBC News Online's Steve Schifferes

Gordon Brown is now reaping the fruits of his prudence during the first two years of the Labour government.

As the chancellor considers his pre-election Budget, he has a large surplus on the current account, giving him scope to cut taxes or raise spending further.

The huge surplus, now estimated to be around 15bn, is 5bn higher than the government predicted.

It is a result of three factors: buoyant tax receipts, boosted by the strong economy, government has been able to spend less than expected and finally "fiscal drag", which increases the amount of tax received by the government during times of economic growth.

The extra revenue has allowed more government debt to be paid off, lowering further the amount that has to be paid out in debt interest, leaving Gordon Brown even better off.

The large surplus means that, at least in present economic circumstances, there is probably scope for another 3bn-4bn of tax cuts or spending increases above and beyond what the chancellor has already announced.

Tax receipts flood in

The main reason for the government surplus is the large amount of tax revenue the chancellor has been collecting from all of us.

Tax receipts in January surged to a surplus of 16.7bn, the largest on record, as the proceeds of tax paid under self-assessment schemes became due.

Tax receipts have gone up for several reasons.

The strong economic growth, which reached 3% in 2000, has meant that businesses and individuals have spent more - and the tax take from VAT, from excise duties, and from income and corporation tax has risen.

But income tax receipts, in particular, rise even faster than that - because the tax system is progressive. More people are drawn into the tax net, and especially into the higher rates of tax, because the tax allowances are only indexed to inflation.

So the number of people paying the higher rate of tax, for example, has increased by 1m to 2.7m.

And it may be that the introduction of self-assessment has also led to a further increase in reported tax.

Most observers believe that these factors will push the tax take up over the next few years, keeping the budget in surplus even after the big spending increases which are planned over the next few years.

That is because the government projections assume that the economy will only grow at a conservative 2.25% per year, while most independent forecasts suggest higher growth rates in the future.

Meeting the golden rules


The growing surplus means that the government is easily meeting its own rules for fiscal restraint.

The first rule, called the golden rule, says that the government should be able to pay for all its current spending out of its tax revenues, only borrowing money for long-term capital projects.

That is being easily met with the present surplus still growing.

Even if spending increases, and the economy goes into recession, that rule is likely to be met.

Much of that planned increase will be capital spending, which is set to grow by nearly 4% each year to 18bn - so the government deficit would have to reach 2% of GDP before the golden rule was breached.

Under another rule, the total debt held by the government should be "sustainable" and below 40% of the total economy.

In fact, debt is set to fall to around 30% of GDP (gross domestic product) in the next few years - giving the government an unexpected windfall in the form of the lower debt service payments.

The cut in the debt has occurred both because of the budget surplus, and because the 22.5bn in windfall profits from the auction of mobile phone licenses has been applied to reduce borrowing.

Where's the money gone?

But many people wonder, with tax receipts so high, where the money has gone.

The truth is that most of it has gone to reduce the public sector deficit that Labour inherited when it came to power.

Only in the last two years has Labour increased spending in real terms.

The severe spending constraints of the first two years - when the government followed Conservative spending plans - have been just balanced by plans for big increases in spending in the past year.

The result is that government spending currently amounts to 40% of the whole economy - not much different from the average during John Major's last years in office.

However, the pattern of government spending has changed.

Prosperity has meant that less has been spent on cyclical government programmes like social security, leaving more room for spending on popular causes like health and education.

Underspending

But the government has received an unexpected boost to the public purse - because government departments have not been able to spend the money they have been given.

Last year spending was 10bn less than planned by the government.

The underspending by departments has been particularly marked in terms of big capital projects like roads and hospitals - where there might have been delays in getting project approval.

And although departments can carry forward money towards the next spending year, the shortfall is embarrassing for a government pledged to boost public spending.

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See also:

20 Feb 01 | Business
Brown's bulging war chest
12 Feb 01 | Business
UK spending levels under fire
20 Feb 01 | Business
CBI calls for tax cuts
20 Nov 00 | Business
Record UK budget surplus
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