Budget 1999: Public Finances - Brown's modest giveaway no threat to sound financial management

PREDICTING WHAT will happen to the difference between the Government's revenues and its expenditure is fraught with difficulty. A small change in the growth rate or a small mistake in judgement about where the economy stands relative to its potential can make a difference of tens of billions of pounds on each side of the accounts.

It is little wonder that the average error in forecasting next year's deficit is pounds 10bn. Any assessment of the Treasury's new forecasts for the public finances has to bear in mind these huge uncertainties.

To complicate matters, presentation of the public finances has changed dramatically in the past 12 months. Some important definitions have changed and a new set of national accounts data published last summer has made comparisons with previous budgets complex.

Even so, it is clear that Mr Brown is starting from a far better position than he expected in November's Pre-Budget Report. It has paved the way for a mildly expansionary Budget rather than the strictly neutral one many City analysts had expected.

Tax revenues have come in ahead of the Treasury's cautious forecasts. Lower interest rates have also cut the Government's debt repayments.

In his speech yesterday, the Chancellor boasted: "Britain's fiscal position is not only sound today but on the soundest possible footing for the future." The net pounds 6bn giveaway over three years, in tax cuts and increased spending announced yesterday, will be paid for by a combination of higher borrowing and savings on interest payments. In addition, of course, some groups of people are tax winners and some tax losers.

The overall tax burden is forecast to decline slightly as a share of GDP, dropping to 36.6 per cent next financial year, having risen from 35.4 per cent in the year before Labour took office to 37.2 per cent last year.

Tax increases announced in previous budgets, including the abolition of profit-related pay, of advance corporation tax, with the fuel and tobacco escalators, explain the step up in the tax burden compared with the early Nineties.

They were needed to repair the damage to the public finances caused by recession and ill-judged tax cuts. They will pay for the 3 per cent a year real-terms increase in spending on public services over the next three years.

The Budget Red Book now publishes predictions for three measures. The City focuses on the Public Sector Net Cash Requirement (PSNCR), equivalent of the old PSBR (Public Sector Borrowing Requirement). Yesterday's statement put this in surplus by pounds 5.2bn in the current financial year, compared to the pounds 2.8bn (excluding windfall tax) predicted in November. The figure for next year is pounds 4.5bn in deficit, rather than the earlier forecast of pounds 1bn. This difference, with its immediate implications for the Government's funding needs, sent a shockwave around the gilts market yesterday.

However, two other measures are now given greater prominence because they are needed to assess whether the Chancellor is meeting the two rules for sound finance set out in the Code for Fiscal Stability. The Office for National Statistics is working on producing these monthly, rather than quarterly as at present.

The first rule, the "golden rule", says that the Government can borrow only to finance investment spending, so that the day-to-day current spending must balance with revenues over the course of a business cycle. The surplus on current budget is the relevant measure here.

The second rule is that the ratio of net public sector debt to gross domestic product must be "stable and prudent", defined as 40 per cent of GDP. Public- sector net borrowing is the key measure for this rule. (It differs from the PSNCR by the value of sales of financial assets and other financial adjustments.)

The current balance is put at a surplus of pounds 4.1bn this year (compared with the pounds 5.5bn predicted in November) and pounds 2bn in 1999-2000 (up from pounds 1bn). The Red Book predicts a gently rising surplus up to pounds 11bn in 2003-04.

The net borrowing figure shows a repayment of pounds 1bn this year, and a small deficit of pounds 3bn next year. Continuing small amounts of borrowing keep the net debt ratio stable at just below 40 per cent of GDP.

If the forecasts are correct, Mr Brown will comfortably meet his two rules, and satisfy the Maastricht criteria for membership of the single European currency. Even if the economy turns out much weaker, many experts think the public finances will remain in decent shape.

"I give them real credit for controlling public spending so tightly. That is what has put them in such a happy position," said Roger Bootle, managing director of Capital Economics.

Others were less impressed. "This is definitely a fiscal relaxation," said Steven Bell at Deutsche Bank.

The Treasury has taken a cautious approach. The Red Book bases the main forecasts on GDP growth of 1 per cent in 1999, the bottom of the range. For the first time, too, social- security spending forecasts are based on an assumption derived from outside forecasts that unemployment will rise slightly.

If growth is closer to the 0.6 per cent average of other forecasts, it could throw out the current budget figure by another pounds 2bn or so this year. But as this would be due to the economic downturn, it would fall within the "over a business cycle" definition of the rule and could be recouped later.

Even if the Treasury's forecasts do fall victim to slow growth or to the other uncertainties that can so easily hit tax and spending, the public finances are undoubtedly on a much sounder footing than at any time in recent memory. The City gives the Chancellor full credit for this.

"The big investors have a lot of trust in Gordon Brown. If he were to leave the Treasury for any reason, that trust would change," said David Owen, an economist at Dresdner Kleinwort Benson.

For a Labour Chancellor to have won over anybody in the financial markets at the same time as winning plaudits for tax cuts and redistribution is an achievement that would have seemed impossible just a few years ago.

Start your day with The Independent, sign up for daily news emails
Sport
England's women celebrate after their 3rd place play-off win against Germany
Women's World CupFara Williams converts penalty to secure victory and bronze medals
Arts and Entertainment
Ricardo by Edward Sutcliffe, 2014
artPortraits of LA cricketers from notorious suburb go on display
News
newsHillary Clinton comments on viral Humans of New York photo of gay teenager
Arts and Entertainment
The gang rape scene in the Royal Opera’s production of Gioachino Rossini’s Guillaume Tell has caused huge controversy
music
ebooks
ebooksAn introduction to the ground rules of British democracy
Latest stories from i100
Have you tried new the Independent Digital Edition apps?
Independent Dating
and  

By clicking 'Search' you
are agreeing to our
Terms of Use.

iJobs Job Widget
iJobs Money & Business

Recruitment Genius: Sales Assistant / Buyer

£15000 - £17000 per annum: Recruitment Genius: This company offers a range of ...

Recruitment Genius: Customer Service Advisor

£15000 - £16000 per annum: Recruitment Genius: Customer Service Advisors are r...

SThree: Trainee Recruitment Consultant

£20000 - £25000 per annum + OTE £45K: SThree: SThree were established in 1986....

Recruitment Genius: Compliance Manager

£40000 - £60000 per annum: Recruitment Genius: A Compliance Manager is require...

Day In a Page

The Greek referendum exposes a gaping hole at the heart of the European Union – its distinct lack of any genuine popular legitimacy

Gaping hole at the heart of the European Union

Treatment of Greece has shown up a lack of genuine legitimacy
Number of young homeless in Britain 'more than three times the official figures'

'Everything changed when I went to the hostel'

Number of young homeless people in Britain is 'more than three times the official figures'
Compton Cricket Club

Compton Cricket Club

Portraits of LA cricketers from notorious suburb to be displayed in London
London now the global money-laundering centre for the drug trade, says crime expert

Wlecome to London, drug money-laundering centre for the world

'Mexico is its heart and London is its head'
The Buddhist temple minutes from Centre Court that helps a winner keep on winning

The Buddhist temple minutes from Centre Court

It helps a winner keep on winning
Is this the future of flying: battery-powered planes made of plastic, and without flight decks?

Is this the future of flying?

Battery-powered planes made of plastic, and without flight decks
Isis are barbarians – but the Caliphate is a dream at the heart of all Muslim traditions

Isis are barbarians

but the Caliphate is an ancient Muslim ideal
The Brink's-Mat curse strikes again: three tons of stolen gold that brought only grief

Curse of Brink's Mat strikes again

Death of John 'Goldfinger' Palmer the latest killing related to 1983 heist
Greece debt crisis: 'The ministers talk to us about miracles' – why Greeks are cynical ahead of the bailout referendum

'The ministers talk to us about miracles'

Why Greeks are cynical ahead of the bailout referendum
Call of the wild: How science is learning to decode the way animals communicate

Call of the wild

How science is learning to decode the way animals communicate
Greece debt crisis: What happened to democracy when it’s a case of 'Vote Yes or else'?

'The economic collapse has happened. What is at risk now is democracy...'

If it doesn’t work in Europe, how is it supposed to work in India or the Middle East, asks Robert Fisk
The science of swearing: What lies behind the use of four-letter words?

The science of swearing

What lies behind the use of four-letter words?
The Real Stories of Migrant Britain: Clive fled from Zimbabwe - now it won't have him back

The Real Stories of Migrant Britain

Clive fled from Zimbabwe - now it won’t have him back
Africa on the menu: Three foodie friends want to popularise dishes from the continent

Africa on the menu

Three foodie friends want to popularise dishes from the hot new continent
Donna Karan is stepping down after 30 years - so who will fill the DKNY creator's boots?

Who will fill Donna Karan's boots?

The designer is stepping down as Chief Designer of DKNY after 30 years. Alexander Fury looks back at the career of 'America's Chanel'