Brown faces his toughest challenge

Gordon Brown is facing the most difficult 12 months of his record seven-and-a-half year spell as Chancellor.

Experts say he now faces a supremely delicate balancing act.

It emerged this week that the £9.4 billion of public sector borrowing last month exceeded City expectations, prompting Tory claims that the Chancellor would have to raise taxes to fill a looming black hole in the nation's finances.

And the International Monetary Fund has urged him to cut spending or raise taxes to reduce national borrowing. It disputed the growth forecasts in his pre-Budget report earlier this month.

Labour will be looking for a spring Budget giveaway ahead of a general election. But Mr Brown will find that a near impossibility without destabilising the economy or breaking his economic rules.

Many experts believe the economy is rapidly running out of steam, while other analysts warn his so-called Golden Rule - that spending must be matched by investment over the economic cycle - is in severe jeopardy. Cormac Marum of accountancy group KPMG said: "I would say it is his most challenging year as Chancellor. It's almost like he is a juggler, and the longer he goes on it seems that the chances of him dropping something must increase."

And as with any chancellor, a number of potential threats could derail Mr Brown's best-laid plans.

Rising energy costs

The high price of oil and gas is one of the biggest threats to the health of the UK economy next year. Petrol prices are 11 per cent higher than a year ago, and account for 0.3 per cent of the 1.7 per cent inflation rate.

Higher inflation from soaring energy prices gives the Bank of England less room for manoeuvre to cut interest rates and boost the economy.

Many companies will have to pass on their higher energy bills to customers in the form of higher prices. British Airways already has an energy surcharge on tickets, while Center Parks recently said it may have to increase the cost of a holiday at one of its resorts.

Property crash

A property crash next year would leave a gaping hole in the Government's coffers because of the knockon effect on stamp duty. Most experts think that is unlikely, but all say the house price rises of recent years will not be repeated next year.

That is still bad news for the Treasury. As house prices have rocketed in recent times, so have the Government's stamp duty revenues. About ?3.6 billion was raised from the unpopular tax on house purchases in 2003-2004, compared with ?830 million four years previously.

Stock market meltdown

A slump in the London stock market would deliver a big blow to the savings of Britain's 15 million private investors, many of whom are still recovering from the dot.com collapse. It would have a devastating impact on life insurers and on pension funds, and would deepen the pension crisis - one of the biggest challenges facing the Government. The City thinks 2005 will be a slow year, predicting the FTSE 100 will be little changed in a year's time at about the 5,000 level.

Debt blowout

Household debt in the UK broke through the ?1,000 billion level for the first time this year - or ?17,000 owed by every man, woman and child in the country. The debt is spread across mortgages, personal loans, overdrafts and credit cards and is growing by 15 per cent a year.

A housing crash or any sharp slowdown in the economy leading to higher unemployment could leave many indebted households dangerously exposed. Up to six million families are struggling to keep up with interest payments.

Spending slump

Whether or not this Christmas proves the disaster for the high street that some in the City have predicted, it is already clear next year will be a tough one for the retail sector. Consumer spending has been one of the engines of UK economic growth. But higher interest-Surging pound

London rates and falling house prices have brought a slowdown, and continued decline will have a knock-on effect on GDP growth. That will in turn further restrict the Chancellor's options.

If the pound continues its surge against the dollar, it will be great news for Britons travelling to Florida. But British exporters are already suffering badly as their goods have become hugely expensive for American buyers.

Manufacturers are already saying business prospects are at 18 month lows because of the pound's strength. Companies like Jaguar say they are being squeezed harder than ever. The trade gap - the difference between our imports and exports - in October was one of largest ever.

The prospects for the capital may be brighter than for the rest of the country, but it still looks like being a tougher than normal year for London. Economic think tank The Centre for Economics and Business Research recently cut its 2005 London growth forecast to 2.7 per cent. Without the house price feelgood factor London's consumers will likely keep a firmer than normal clasp on their wallets.

But the tourist trade should help cushion what could be a tough year for the capital's retailers.

And a recent flurry of City dealmaking has also lifted pre-Christmas hopes for the New Year and the 2005 bonus round.