Brown to borrow record £37bn

GORDON BROWN today announced a surge in Government borrowing and cast a shadow over the British economy. The level of borrowing, he said, is set to climb to £37bn this year - £10bn more than he predicted in his Budget eight months ago.

Mr Brown, in his Pre-Budget Report presented this afternoon, insisted that the rest of the economy was in sound shape and that he was not putting his reputation for prudent management at risk.

But the new borrowing total, a record in cash terms, was at the top end of the predictions from City experts and was enough to set alarm signals ringing at Westminster and beyond.

Humiliatingly, Mr Brown was also compelled to acknowledge that, for the first time, Britain has broken EU guidelines limiting the Budget deficit to 3% of national income. The proportion this year, he conceded, will be 3.4%.

The Chancellor's own doubts were all too clear as he gabbled out the bad news. He was mocked by one MP for speeding up whenever 'he got to the dodgy figures'.

At the same time, Mr Brown was compelled to move to calm a middle England revolt over council tax and pensions. He threw a £400m lifeline to local councils to help keep tax levels down, although some were quick to doubt whether that would be enough to make much difference.

More significantly, a plan to impose a 60% tax rate on better off pensioners, favoured by Mr Brown but opposed by Tony Blair, was suddenly put on hold. The Chancellor had been widely expected today to announce the so-called cap with a higher tax rate on any individual pensions 'pot' worth more than £1.4m.

The Treasury had argued that only a few thousand of the wealthiest would be hit, but others had warned that the impact over time would be very much wider. Today Mr Brown said that because of 'contrasting interpretations' of the effect of the move he was asking the National Audit Office to give an independent verdict on how many would be affected.

He said that the new tax rate would be brought in by April 2005 only 'if a decision is made to proceed'.

The Chancellor delivered a hail of statistics to show the economy in general was doing well with inflation at its lowest for 30 years, interest rates down to a level not seen for half a century, more people in work and economic growth strengthening.

'Britain is enjoying the longest period of peacetime growth since records first began in 1870. So, my sleepless nights have not been due to the economy nor the Opposition,' joked the Chancellor, who recently became a father.

But his Tory shadow, Oliver Letwin later asked simply: 'If the economy is doing so well, why is he borrowing so much?'

Mr Brown announced a range of increased cash aid for a range of schemes from childcare to sports clubs. He announced a £1bn investment in Britain's children which he said would ensure 'not just some, but all of Britain's children had the best possible start in life'.

He said: 'My statement sets out the steps we are taking to lock in our hard-won stability, build a Britain of enterprise and flexibility, give children the chance to realise their potential to the full and make the most of the opportunities from the global recovery.'

As ever, to the dismay of some fearing still more red tape, he unveiled an array of new small-scale schemes to aid industry and enterprise.

Mr Brown was able to point to the fact that his forecast of economic growth this year of better than two% delivered in his Budget in April and widely condemned as over optimistic was turning out to be correct.

And he stuck by his prediction that growth next year and the year after will climb to as much as 3.5%.

Mr Brown and the Treasury are hoping that a healthy economy will translate itself into increased tax revenues which will allow the Chancellor to meet his spending commitments without raising borrowing yet further and without raising tax substantially.

But many in the City and elsewhere believed he was still taking a massive gamble.

The Chancellor gave a welcome to a new report on Britain's lack of affordable homes, which heralds the biggest surge in house building yet. The plan could see 1.3m extra homes built in London and the South-East by 2016. Nationally, housebuilding would climb by almost 40,000 homes a year more than currently planned, a rise of 20%. Mr Brown has been told the higher numbers are essential to meet demand. But the plan threatens a massive new row, with environmentalists and those in the regions already alarmed at overcrowding.

The housing proposals threaten to be the most controversial part of the pre-Budget package. They are based on a report from Kate Barker, a member of the Bank of England's monetary policy committee and a former chief economist for the CBI.

She has argued that the increase is essential not only to meet demand but to hold down the ever-growing rise in prices that is putting homes beyond the reach of many first-time buyers. Her proposal, however, would double the plan put forward by Deputy Prime Minister John Prescott two years ago for a 10% increase, a scheme which itself sparked a massive row.

Mr Brown stressed that the aim would be to build as far as possible in run-down or under-used areas that are already developed to provide affordable housing.

But even before Ms Barker's report was published today, the Council for the Preservation of Rural England warned that it would 'open the floodgates'.