Brown keeps sights on next election as he lays out tough spending plans

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The Independent Online
Tough spending plans will give the Government leeway for extra spending closer to the next election. Diane Coyle, Economics Editor, reports on new Treasury rules for fiscal policy.

In his "pre-Budget" statement to MPs tomorrow, Gordon Brown will set out plans for a new code for public sector finances. It is intended to create the same kind of caution and stability in tax and spending policy that the Bank of England's new independence has established in interest rate policy.

The document will set out the Chancellor's analysis of the changes needed to create a fair tax system, modernise the welfare state, get people back to work and make the economy more competitive. Mr Brown is likely to reaffirm his commitment to a 10p starting rate of income tax, to make sure work pays for those on low incomes.

The publication contains a full chapter on the jobs market. There will be limited progress reports on some of the taskforces set up to reform the tax system, such as the one on tax and benefit integration.

The Chancellor is also expected to confirm that the tax system will be increasingly geared towards discouraging pollution, perhaps through additional car taxes. In addition, he will set out ideas on how to reshape corporate taxes in order to boost incentives for investment. However, aides stress the consultative document will concentrate on principles and will not contain enough detail for anybody to engage in tax avoidance now, four months ahead of the Budget in March.

An accompanying paper spells out the intention to build in a margin for error in plans for the public finances. Targets for government borrowing will take explicit account of the state of the economic cycle.

This means that a boom which automatically reduces the need to borrow cannot be used as an excuse for relaxing a tough policy. Future Budgets will always include estimates of how much changes in the public sector borrowing requirement are simply due to the state of the economy. The move is in line with the Chancellor's intention to avoid the extremes of boom and bust which have long afflicted the British economy.

A Treasury adviser said: "The mistake Labour Governments have made in the past is erring on the side of optimism in the first two years and having to retrench later in the parliament." The new policy was actually put into practice in the July Budget. Mr Brown then forecast a borrowing requirement of just under pounds 11bn this year. Tomorrow he is expected to reduce this target by at least pounds 1bn thanks to strict spending control and higher tax revenues.