FTSE 100 hits peak on record Budget surplus

HOPES that Gordon Brown, the Chancellor of the Exchequer, will introduce his promised 10p starting rate of income tax and reduce National Insurance contributions for the low-paid in next month's Budget received a big boost yesterday from news of record income tax payments last month, thanks in part to the introduction of self-assessment.

The Government made the highest-ever monthly repayment of the national debt in January. The surplus of revenues over spending amounted to pounds 10.4bn, compared with pounds 5.7bn in the same month last year.

The Chancellor should easily beat his pounds 9.5bn target for government borrowing in 1997/98, City experts predicted.

The unexpected tax bonanza in January led Malcolm Bruce, the Liberal Democrat Treasury spokesman, to accuse Mr Brown of building up a "war chest" of cash in time for the next general election.

"These figures prove that the Chancellor has money available to invest in schools and hospitals if only he is willing to end his dogmatic adherence to Tory spending plans," he said.

But the City welcomed the news. The feelgood factor, along with a rebound in Asian stock markets, merger mania and a buoyant start on Wall Street, helped the FTSE 100 index climb almost 90 points to reach 5,709.5, a new all-time high.

The surprise figures also boosted gilts, with the yield on 10-year government stocks declining to 5.89 per cent, the lowest for 30 years.

Simon Briscoe at Nikko Europe said: "In an era of low inflation and at this stage in the business cycle, the Government should be repaying debt."

David Bloom at HSBC James Capel said the Government's new system of rules for prudent finances was already proving its worth.

Almost all the analysts who monitor the state of the Government's finances now expect the figure for the public sector borrowing requirement (PSBR) this financial year to turn out lower than the target, with most forecasts in the pounds 6bn to pounds 9bn range. This would be the best result since 1991 - and still leave the Chancellor scope to finance some of his tax pledges.

The front-runners are a reduction in national insurance contributions for low earners and the introduction of a 10p starting rate of income tax.

January normally brings a big repayment of government debt because corporation tax receipts have, in the past, been clustered in that month and October. However, the surprise this time around came from high income tax receipts.

This was partly due to the introduction of self-assessment, which reduced revenues in December but boosted them in January by around pounds 2bn. Total income tax revenues were pounds 11.8bn, more than twice December's level and more than pounds 3bn higher than in January 1997.

Allowing for that, tax revenues were still more buoyant than expected in the latest month but just below the Treasury's target for the year to date. Total receipts have grown by just over 7 per cent in the first 10 months of the financial year, compared with the 8.1 per cent forecast.

The underlying reason for the improvement in the PSBR as a whole has been tough control of spending by Whitehall departments. This was lower than a year earlier, whereas the departmental spending plans the Chancellor adopted from his predecessor allowed for a 1.7 per cent increase for the year.