Brown banks on boom

Gordon Brown's tarnished reputation for prudence suffered a fresh blow today as he cut his economic growth forecasts and raised his borrowing plans for the second time in six months.

In a massive political gamble, he also bet that a return to boom times next year will pay for the Government's huge injection of cash into public services without the need for headline-grabbing tax increases.

But he admitted public finances would plunge deeper into the red in the near term. The Treasury said the new measures would have a broadly neutral impact on the fiscal position.

A pugnacious Chancellor was at pains to deflect the blame for slower growth away from himself by pointing the finger at troubles in the global economy.

"Of all the major global economies, Britain is now alone in combining low inflation with the lowest unemployment in a generation," he said. "Britain, even amidst global uncertainty, is not only doing better than in the past but also doing better when we make the comparison with other countries."

Mr Brown forecast in the November Pre-Budget Report the economy would expand this year by between 2.5 per cent and 3 per cent.

Today he admitted that growth of between 2 per cent and 2.5 per cent was more likely, bringing him closer in line with the consensus among City economists.

For next year, however, he stuck with his existing forecast of 3 to 3.5 per cent, predicting the same rate of expansion in 2005. He said consumer spending would grow at a more sustainable 2.75 to 3 per cent this year, and the housing market would slow. Helping to bring the economy back onto a more even keel, manufacturing output and business investment would pick up.

He confirmed an extra £3billion is being made available for the armed forces in Iraq and announced a new £240 million grant to the United Nations for humanitarian aid. Some £330million will be put aside for domestic anti-terrorism measures.

The knock-on effects of slower growth on the public finances were substantial. The Chancellor said that the 2003-4 financial year would see public sector net borrowing of £27billion rather than the £24billion forecast in November. The existing £19billion forecast for the following year was bumped up to £24billion. Borrowing for subsequent years was put at £23billion, £22billion and £22billion.

Inflation was seen ending 2003 at 2.75 per cent, above the Government's 2.5 per cent target, before dipping back to target next year.

The Chancellor's speech was given a muted reception in the City. Shares remained in negative territory and sterling close to an earlier four-year low of 69.40p against the euro.

Despite the deterioration in the public finances, Brown insisted he would not breach his own fiscal rules, crucially his so-called Golden Rule which allows borrowing only to invest and not to fund current spending.

The test is met when, over the economic cycle, the current budget, which covers the everyday costs of running schools, hospitals and other public services, is in balance or surplus. Today's Budget shows that it just remains in surplus throughout the forecast period, suggesting hefty tax rises are not needed yet. However, experts expect higher taxes further down the line, probably soon after the next General Election.

Ciaran Barr, chief UK economist at Deutsche Bank, said: "There are genuine concerns over the health of the fiscal accounts but, in the current economic environment, the Chancellor is arguably powerless to take preemptive action. As such, unpopular tax hikes can be left for another day."

Economists said today's Budget would have little impact on tomorrow's Bank of England meeting on interest rates at which the cost of borrowing is expected to be held at 3.75 per cent.