He's buttering us up now and offering jam tomorrow

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The Independent Online

Every Chancellor likes to pull a rabbit out of the hat on Budget day. Mr Brown did it this year by billing his package in advance as a Budget for Business and then using the occasion to announce significant rises in public spending. Many expected a Budget aimed at keeping former Conservative voters in the New Labour fold. We got it. But we also got a Budget for the party faithful. Mr Brown and Mr Blair still need them to go out and pull in the votes at the next election.

Mr Brown pulled off this trick because he has realised that you can win the business vote without offending core Labour supporters by focusing on concessions that only the specialists understand. The 59 measures announced in Budget 2000 include 13 billed as pro-business. Among these are a new All Employee Share Ownership Plan (Aesop), a Corporate Venturing Scheme, Enterprise Management Incentives for small businesses and a more sharply tapered capital gains tax. And that's the easy bit! Advanced students can try their hand at changes to group rules for corporation tax losses and reductions in minimum holding periods for EIS/VCTs.

But the real story of this Budget is that Mr Brown revealed how he intends to spend the electoral war-chest that he has accumulated by fiscal prudence and by good fortune. He will preside over a significant expansion of public spending, notably on health, education and infrastructure investment, paid for by borrowing more.

He can afford to do so because his early tax and spending decisions on taking office have given him freedom for manoeuvre. A uniquely powerful Chancellor, he has the ability to resist the demands of spending colleagues, and quickly earned the respect of Treasury officials when he took over. On the tax side he carried out a lucrative raid on the pension funds, and imposed repeated increases on tobacco and fuel.

The swing into surplus has been helped (and this is Mr Brown's good fortune) by a strong economy. Britain flirted with recession in 1998, but recovered convincingly in 1999. Falling unemployment has reduced spending on social security, and low interest rates have cut the debt interest bill. But, as always, it is on the revenue side that the benefits of boom are mainly felt. Boosted by stamp duty windfalls from a vigorous housing market and a vibrant stock market, government revenues in 2000-01 are now expected to exceed estimates in last year's Budget by no less than £12bn.

Yet Mr Brown dare not spend these resources so carefully husbanded - not yet. The strong recovery has already prompted the independent Bank of England to raise interest rates. Inflation is still on target, but wages and producer prices are accelerating. If Mr Brown had stoked up the boom in this Budget, the Bank would swiftly have raised interest rates again - and he would have got the blame.

Higher interest rates would intensify the chronic problem of the too-strong pound. Sterling is higher today than when the UK dropped out of the Exchange Rate Mechanism in 1993. The resulting malaise of manufacturing industry has been underlined this month by the Rover crisis. Mr Brown cannot afford to further alienate Labour support in the old manufacturing strongholds.

That is why he chose to devote most of his £12bn windfall to repaying debt - this year. By "locking in" (as he put it) the fiscal surplus (and by increasing stamp duty to cool the housing market) he has delayed the next rise in interest rates.

But to motivate and mobilise his core support he needed to do more. Therefore this prudent Chancellor has taken a calculated risk. If we compare figures for 2003-04 with last year's Budget projections, we find an increase of £6bn in current spending and an increase of £5bn in net investment. Since he is assuming (very prudently) only a £3bn increase in receipts for that year, he is planning to raise net borrowing by £8bn. That is how he has found the money to pay for the dramatic medium-term increase in public spending that stole the headlines on Budget day.

It is a refreshing change. Many past Labour Chancellors have presented Budgets that showed public spending higher than the nation could afford in the short term, but promised tighter control in the medium term. This year we have the unusual spectacle of a Chancellor demonstrating tight control in the short term but promising to spend more tomorrow. It is St Augustine in reverse: make me profligate, but not yet.

It almost guarantees New Labour a second term of office. But if things go wrong the strategy revealed in this Budget may make it more difficult to obtain a third.

Bill Robinson is a former special adviser to the Chancellor of the Exchequer and Head UK Business Economist at Pricewaterhouse-Coopers.