A supremely political plan

Click here for more columns by Peter Kellner

If the economy grows as Gordon Brown expects, then he will be able to cut income tax by 3p in the pound before the next general election. For all the talk of higher taxes to pay for the NHS, detailed figures published after yesterday's Budget speech show that the Chancellor could have £10billion to give away by 2005/6.

Meanwhile, his decision to raise National Insurance rates both for employees (which was expected) and employers (which was not) will be difficult for the Conservatives to attack - because they did much the same when they were in office.

The Chancellor's hopes of being able to cut taxes later in this Parliament arise because he has been doubly cautious about his assumptions for the Government's finances. First, his plans involve two different sets of predictions about Britain's future growth rate. One set gives him his economic forecast. This predicts a sharp recovery in the months ahead, with the economy growing by more than 3 per cent next year. However, a different, lower, set of growth figures is used to forecast public finances. The difference is one quarter of one per cent each year. This sounds trivial, but the cumulative effect soon builds up. By 2005/6 - which is when the next general election is likely to be called - the gap between the two sets of growth predictions is equivalent to £5-6 billion in the state of Britain's public finances.

That is, if the Treasury is right about Britain's economic prospects, then tax revenues will be higher than yesterday's fiscal forecasts, and spending on income support and unemployment benefit will be lower.

All told, the public coffers will be £5-6 billion better off than yesterday's tax-and-spend forecasts indicate.

The second way in which Mr Brown is being cautious concerns his "golden rule". This states that, over a full economic cycle, taxes and current spending should be in balance, with the Government borrowing only to invest (for example in new roads, schools or hospitals).

However, yesterday's figures show Mr Brown is aiming not for taxes and current spending to be in balance, but for taxes to exceed spending by an average of £8billion a year. This means the Chancellor could spend £8 billion a year extra - on tax cuts or public services - and still keep to his "golden rule".

He is unlikely suddenly to do that. But if the economy remains buoyant, and the public finances prove healthier than expected, he might well be tempted to halve his £8 billion cushion. Such a move, after eight years of economic growth, would be unlikely to frighten the City. This would give him an extra £4 billion to play with.

If we take these two factors together - the economy growing steadily, and Mr Brown deciding not to overshoot the "golden rule" quite so much - then by the spring of 2005, the Chancellor would have up to £10 billion extra to spend. That is equivalent to 3p off the basic rate of income tax. In practice he is unlikely to choose that option. He is more likely to divide the money into smaller parcels: more help for the low-paid, a little relief for the voters of middle England, more for schools, trains and the police.

Cynics will say this is the Chancellor up to his old tricks: delivering bad news at the beginning of a new Parliament, and then building up a war chest in time to bribe voters at the following election. Mr Brown would doubtless retort that it is far better to be prudent than profligate, when nobody can be sure whether the current recovery will last. He would rather surprise the taxpayer with good news when things go well, than abandon caution and risk stinging us all with yet further tax hikes if the economy stumbles.

Until then he must, of course, face charges that he has put taxes up, and many will complain that his chosen method, higher National Insurance, violates the spirit, if not the letter, of Labour's pledge not to raise income tax rates. However, this is a charge that the Tories will be wise to avoid, given their own record when they were in office.

When Margaret Thatcher came to power in 1979, most workers paid only 6.5 per cent of their earnings on National Insurance. Fourteen years later, the figure was 10 per cent. Gordon Brown will have been well aware of this as he prepared his plans for the rest of this Parliament. Taking everything together, we should be under no illusion. This supremely political Chancellor yesterday delivered another supremely political Budget.