Euro entry is now remote

ECONOMISTS see the Budget as a significant step back from euro entry. This is partly because Gordon Brown did nothing to defuse the consumer boom, making interest rate convergence with euroland more difficult.

It is also because the steep rise in public spending will be much easier to accommodate under the Chancellor's own 'golden rule' than under the more restrictive European Union Growth and Stability Pact, which he discreetly rubbished in his Budget documents.

A paradox of the Budget is that it flagged hefty tax rises, but not until next April. With retail sales shooting up at 6% a year, that leaves all the work of slowing them down to be done by interest rates.

UK base rates at 4% are closer to euroland's 3.25% than they have been for years. This offered euro enthusiasts like the Prime Minister the chance for a dash towards entry. Instead the rate gap is likely to widen.

Mark Cliffe, at ING, said: 'Euro enthusiasts will know that a big opportunity for convergence has been missed.' Gerrard economist Simon Rubinsohn agreed: 'Economic convergence will now be harder to achieve.'

Because Britain is likely to grow faster than euroland in 2002, sterling may also stay strong. For entry, it would need to weaken.

Steven Andrew, of RSA Investment Managers, said the tighter rules of the EU's Pact would mean that, as public spending rises, Brown would have to fund more of the total from higher taxation rather than borrowing. The EU warned the Chancellor in January about borrowing. In a short passage in the Budget document, his riposte was that 'a prudent interpretation' of the EU pact would allow 'appropriate flexibility'. In Treasury language, that is the equivalent of telling Brussels to take a running jump.

Royal Bank of Scotland economist Geoffrey Dicks said: 'If the Chancellor had moved toward a much smaller Budget deficit, that would have been the clearest signal possible he was preparing for EMU. In fact he did the reverse. I don't think it is now likely within this Parliament.'

Cliffe said: 'This was a radical change towards tax and spend. There is a big debate ahead on this. That makes it unlikely they would want to get embroiled in a very controversial euro debate at the same time, especially if high taxes damage their popularity. This reinforces the likelihood that they will postpone a referendum until the next Parliament.'