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Borrowing to rise as Brown cuts growth forecasts

Budget Countdown: Big tax rise off the agenda but Chancellor sticks to ambitious public spending plans

Gordon Brown will cut his growth forecasts for the UK this week, in what is expected to be a low-key Budget which will avoid significant increases in taxation for fear of further damaging fragile economic confidence.

The Chancellor is expected to forecast growth for 2003 in a range of 2 to 2.5 per cent, down from the 2.5 to 3 per cent estimate he gave in November. The forecast of 3 to 3.5 per cent for 2004 will also be trimmed by half a point.

Despite the revised forecasts, Mr Brown will stick to his ambitious public spending plans, arguing they can be met by a short-term increase in borrowing. The Chancellor is expected to add about £5bn to his borrowing totals for each of the next two years, taking them to £29bn for 2003-04 and £24bn in 2004-05. However, many economists believe borrowing will have to be a lot higher than this and some are pencilling in figures as high as £46bn-£50bn for next year.

Aside from pre-announced measures which take effect this year, such as simplification of the VAT regime for small businesses, abolition of bingo duty and cuts in duty for green types of fuel, the Chancellor is widely expected to clamp down further on tax avoidance, and extend tax breaks for research and development.

He is also expected to impose stamp duty on property lease deals, although it is less clear whether he will raise the level of duty on property transactions worth more than £1m as had been feared.

Mr Brown is expected to use his Budget statement on Wednesday to blame faltering growth and a lack of reform in "old Europe" for holding back the world economy.

The Chancellor will make a direct reference to the weak performance of countries such as France and Germany, and compare Britain's overall low unemployment and labour market reforms to its neighbours'.

A leaked European Commission study showed last week that the growth forecast for Germany is to be cut from 1.4 to 0.4 per cent, for France from 2 to 1 per cent, and for the eurozone as a whole to 1 per cent. Mr Brown will stress that even Britain's revised growth rates are still double that of the eurozone average.

The Chancellor is less likely to point out that British productivity, one of his main concerns, remains way below not only the US, but also France and Germany. In terms of output per hour worked, annual growth in productivity has fallen from the 2 per cent average of the last Tory governments to 1.3 per cent today.

But a Budget with a eurosceptic edge would fuel speculation that the Treasury will deliver a "not yet" verdict on its five economic tests for euro membership in June.

The Treasury has to date confirmed only that it is doing "preparatory work" on the tests, but Mr Brown may announce that the main euro assessment has finally begun.

With national insurance contributions having gone up by 1 per cent yesterday, the Tories claimed that the Chancellor was hitting the public with a "triple whammy" of NI increases, council tax increases and frozen personal allowances. Taken together, the changes increased the tax burden by £568 a year for the typical family, they said.

Michael Howard, the shadow Chancellor, gave his strongest indication yet that the Tories would reverse the NI rise if the country's finances allowed. On the BBC1 programme Breakfast with Frost, he said: "I would love to repeal it after the next election, if I'm in a position to do that, of course I'll do it. But nobody knows by how much more the present government will have borrowed, how much more they'll have increased taxes, what sort of a state our finances will be in at that time."

Digby Jones, director general of the CBI, urged Mr Brown not to throw the extra revenue raised from higher NI contributions at "unreformed public services". The employers' leader said: "Firms will take a pretty dim view if that money ends up getting lost in a black hole. We want better public services, not just bigger public services."

Ministers will be worried by a new YouGov opinion poll published yesterday by the Mail on Sunday which showed that 62 per cent of the public would oppose further tax rises to pay for schools and hospitals.

Most alarming was the 72 per cent who said they expected the money already being raised through the NI increase to be wasted, compared to just 22 per cent who thought it would improve the NHS. YouGov interviewed 2,012 people online on 3 and 4 April.