Jeremy Warner: If public finances look like this at the top of the cycle, think how bad they are at the bottom

On the big numbers, the new Chancellor has been dealt such a poor hand that there was never going to be a whole lot he could have done with it. His room for either lavish tax cuts or exuberant new spending commitments was virtually zero. It would none the less have been interesting to have seen the early drafts of yesterday's pre-Budget report and comprehensive spending review – the ones under preparation when it was still thought possible that Gordon Brown would call an early, snap election.

These presumably would have contained a lot more pep, and perhaps a more high-risk approach to bribing the voter with his own money. In the event, most of the new stuff seemed only to be borrowed from ideas already aired by the opposition parties, right down to the decision to switch the burden of air passenger duty from the individual to the aircraft, so as to discourage half-empty airplanes. It seemed like a pre-Budget report more driven by media and political pressures than the Government's own agenda, and therefore quite reactive after the dithering over the election date.

Yet the politics of inheritance tax, private equity and non-doms, did at least serve the Government's purpose in one regard, which was to distract attention from the affordability of Labour's spending plans. As ever, the public finances were presented as all hunky-dory and nothing to worry about. Repeating the mantra of his predecessor, Mr Darling insisted that both the golden rule and the sustainable investment rule were met both this cycle and the next, as if this somehow makes everything all right.

But they are, of course, only achieved assuming the Government's forecasts for future growth and the scope for productivity gain in the public sector are also met. On both counts, that's an heroic assumption. As it is, the sustainable investment rule, which requires that public debt is kept to 40 per cent or less of national income each year, is only just adhered to. The Chancellor has cut his forecast of growth for next year, but only by half a percentage point, with output expected to return to an above trend rate of 2.5-3 per cent annually thereafter.

In other words, any slowdown prompted by the present turmoil in credit markets will, on the Government's projections, be small and short-lived. Labour has defied the sceptics for so long on economic growth that it perhaps deserves now to be given the benefit of the doubt. Yet is not this optimism also wearing a little thin? One of the reasons UK growth survived the last downturn in the world economy so successfully was because the Government was able to spend its way out of recession. No such such option exists this time around.

Indeed, the Government is already being forced to squeeze spending quite severely to stay within its rules. If the situation is as bad as this at the top of the cycle, with borrowing at a level more appropriate to a recession than a boom, just think what it will be like in a pronounced downturn. Alistair Darling will just have to hope and pray that he's even more lucky than his predecessor, for there's nothing left in the fiscal cannon if economic conditions get really rocky.

Still, despite these obvious concerns, Mr Darling's first pre-Budget report was politically well-directed. In a number of important respects, it managed to shoot the Opposition's fox. Mr Darling has also demonstrated himself to be genuine in his stated aim of simplifying the tax system. Quite a lot of the detail is aimed at reducing the administrative burden, particularly for smaller enterprises.

By the same token, however, any fiscal tightening is achieved largely at the expense of business. Closing tax loopholes may seem like a laudable aim, and it certainly plays to the gallery, but to the extent that this usually means that business and the City are taxed more, it further undermines competitiveness.

The reforms on both inheritance tax and capital gains are on the face of it quite clever, as well as fitting in with Mr Darling's aim of simplifying the tax system. If he keeps this up, he really will mark himself out from his predecessor, Gordon Brown, who had a terrible but perhaps deliberate penchant for making matters unnecessarily complicated.

The inheritance tax (IHT) reform is particularly cute, for it merely legitimises something that with a little bit of tax planning householders were able to do anyway – transfer the spouse's IHT allowance to the children. In these circumstances it is actually quite surprising that the Treasury has costed this giveaway at as much as £1.4bn.

It could reasonably beassumed that the bulk of estates caught by the old rules already have or would in future have taken evasive action. If all Mr Darling is doing is taking away the administrative hassle of setting up the requisite trust arrangements in the will, he's not really giving anything away at all.

Still, those liable for death duties ought perhaps to be thankful for small mercies. Until the Tories demonstrated what a vote winner IHT reform might be, it was widely assumed the Government would close the loopholes that allowed the spouse's tax allowance to be passed on. Now Mr Darling has gone the other way and enshrined them.

The decision to impose a single, 18 per cent capital gains tax rate also fits in with the theme of simplification as well as hammering home the point that Mr Darling may after all be his own man. Taper relief was a reform introduced by Gordon Brown when he first entered office. It's now been swept away.

That said, the reform is a net positive for the Treasury of £900m, so in the round, there are more losers than winners. The beneficiaries somewhat perversely include second-home owners and buy-to-let landlords whose tax rate on gains is reduced from between 40 and 24 per cent to just 18 per cent.

The losers include entrepreneurs and private equity partners. Under the old regime they have had to pay only a 10 per cent tax rate. Also in this category are gains on AIM listed stocks and shares held in larger company employee share ownership schemes. Quite a bit of City bonus money which has been paid in shares will lose the benefit of the old taper relief rate.

Even so, the new regime has been set at a level which is probably just about low enough to maintain Britain's competitiveness. It's hard to believe many private equity players are going to be driven offshore by this. Certainly it could have been a lot worse, for the key gripe about private equity tax perks is not so much the rate itself as the fact that partners are allowed to treat what is essentially income as capital gain.

Mr Darling has left this particular aspect of private equity tax treatment untouched. Against the 40 per cent higher income tax rate, 18 per cent still looks generous. Nor has the Chancellor attempted to attack tax relief on interest payments, another key part of the private equity proposition. Privateequity might reasonably think it's got off lightly.

j.warner@independent.co.uk