Net tax increases not as harsh as experts predicted

The Economy: PUBLIC FINANCES

With more "black holes" spotted in the public finances than in outer space recently, Gordon Brown has had plenty of excuses for a tough Budget. He did not entirely grasp them.

The net tax increases he announced, especially those falling on consumers rather than companies, were smaller than many experts had anticipated.

Even so, the path for the gap between government revenues and expenditure, the public sector borrowing requirement (PSBR), predicted in yesterday's Budget shows a sharper and faster fall than Kenneth Clarke was able to forecast seven months ago.

This has been possible despite the recent report from the National Audit Office introducing far more cautious assumptions about long-term growth, unemployment and the savings from cracking down on fraud and tax evasion.

These resulted in an addition to the expected PSBR climbing from pounds 500m this year to pounds 7bn by 2001/02.

But this extra borrowing has been more than offset by faster-than-expected growth in tax receipts since last November as the economy has gathered steam. The Clarke boom has brought Mr Brown a revenue bonus.

Thanks to upgraded predictions for the growth of money GDP and profits, the Treasury has been able to lop pounds 4bn off the PSBR forecast for this year and more than pounds 6bn next year.

With proceeds from the windfall tax also hitting the coffers before it is all spent, the PSBR is now expected to be pounds 10.9bn this year, compared with the previous forecast of pounds 19.2bn. Next year's is down from pounds 12.2bn to pounds 4bn.

In an innovation, the Treasury has offered a range of scenarios for later years, depending on different forecasts for spending growth. This seems entirely sensible, given that the Government has launched its long-term spending review.

In all cases - slow, medium and faster expenditure growth - the PSBR is projected to be in surplus by 2000/01 at the latest, and to be below the plans set out in last November's Budget.

This looks a dramatic improvement, but the bottom line judgement on how tough the Chancellor has really been is the amount by which he has deliberately raised taxes compared with the plans set out last time around. The answer is pounds 3.4bn in the current year and nearly pounds 4bn in 1998/99, excluding the windfall tax.

Most of this discretionary increase will hit business. The biggest chunk is the abolition of dividend tax credits, only partly offset from next year by reduced corporation tax.

The increase in stamp duty and reduction in Miras contribute a smaller amount - only pounds 240m this year, rising to around pounds 1.5bn a year. The additional increases in excise duties raise pounds 740m this year, declining to pounds 250m in 1998/99.

The real toughness is still on the spending side of the government budget balance.

Despite pulling his rabbits out of the hat for health and education, of pounds 1.2bn and pounds 2.3bn respectively, the Chancellor has stuck with the "eyewateringly tight" Tory spending plans for the next two years. The control totals set out yesterday are unchanged from November.

The extra funds for the top priority areas have been found from next year's contingency reserve, which is normally halved as the year to which it applies rolls around.

"The reserve is there to be spent and we knew it was going to be spent on health and education," said Geoffrey Dicks, chief economist at NatWest Markets.

Even so, Mr Brown has kept his promise - or threat - on spending. Apart from the welfare-to-work plans for which the windfall tax has been earmarked, there is no fresh increase in expenditure set out in the Budget.

The share of government spending in GDP is therefore forecast to decline to below 40 per cent of GDP by the end of the century.

However, to the extent that the Treasury's forecasts, validated by the National Audit Office, are over-cautious about future growth in tax revenues, the Government will have scope for extra spending in later years.

For example, the Treasury has reverted to its assumption that unemployment will stay flat, whereas in fact it is falling smartly.

Likewise, the return to the forecast of 2.25 per cent for the economy's trend growth rate will probably prove too gloomy. If so, there will be a faster increase in tax receipts as the economy expands.

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