Brown trying to delay the inevitable

ALTHOUGH the Chancellor did his best to play the role of Santa Claus to parents and children in today's Pre-Budget Report, he was hampered by the fact that his Christmas sack was virtually empty.

As probably the penultimate fiscal event before the general election, expected in May, the PBR was always likely to be something of a holding exercise.

Much as Mr Brown would have liked to have offered some juicier handouts, the general state of the public finances and, in particular, the narrowness of the margin with which he himself expects to meet his own fiscal rules, meant that he had very little money to give away.

The childcare measures, along with the freeze to fuel duties and extra money for military operations in Iraq, amounted to no more than £700m this year, falling to less than £400m next year.

At the same time, though, the political timetable obviously precluded any meaningful action to put the public finances back in order.

But I think this was just putting off the inevitable. True, Mr Brown's optimism towards the economy over the past year has been borne out, with GDP set to expand at the 3% to 3.5% rate he predicted in the spring Budget.

But his gamble that the economy will expand at a similar rate next year already looks like a bet too far in the light of the growing evidence of a downturn in the housing market and a pretty weak overseas environment.

My own bet is that growth slows to around 2.3% in 2005 as falling house prices hit household spending.

Even if Mr Brown defies the odds and gets the economy right again, there is no guarantee that the public finances will respond as favourably as he hopes.

Despite the strong economic growth of the last year, tax receipts have still significantly undershot the forecasts included in the last Budget.

The Treasury has suggested that the later months of the year will see a surge in corporation tax receipts from oil companies, whose profits have been boosted by the strength of oil prices. But this is unlikely to bring any more than £2bn of extra revenue, whereas receipts are so far on track to fall short by roughly double that.

In any case, receipts are just one half of the problem.

Borrowing has also been boosted by faster than planned growth in public expenditure. The upshot is that Mr Brown is in serious danger of breaking his own Golden Rule to borrow only to invest over the economic cycle.

The fact that the cycle is not due to end until 2006 means that he can put off any corrective measures until after the general election.

But after that, decisive action will be required to put the public finances back on a sustainable footing at the start of the next cycle.

Slower spending growth may take some of the strain Mr Brown announced more measures aimed at efficiency savings in the public sector today and he will no doubt be hoping to add to those.

But that is unlikely to be enough. My guess is that taxes will also have to rise by around £10bn per annum, roughly the equivalent of 3p on the basic rate of income tax.

Along with a weaker housing market, this is another reason to expect the growth of household spending, and of the economy overall, to be rather slower over the coming few years than it has been over the past few.

Times are set to get harder.

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