Brown admits defeat on his golden rule

Gordon Brown, the Chancellor, has quietly dropped his claim he will meet his "golden rule" of balancing the Government's books even on a cautious interpretation.

Last week's pre-Budget report was the first since he took office to admit the public finances would fall into deficit at the end of the economic cycle on the "cautious case" - that growth comes in 1 percentage point lower than its central forecasts.

An overlooked paragraph of the PBR states that on this basis "the average surplus on the current budget in the cautious case is no longer positive".

Peter Spencer, chief economic adviser to independent forecaster the ITEM Club, said: "That is just a polite way of saying that the golden rule is broken."

In April's Budget the Treasury said the Government was on track to meet the golden rule over the economic cycle "even on the cautious case".

Yesterday Treasury sources said the change reflected the fact the economy was now very close to the forecast end of the cycle in 2005.

They said it was now more appropriate to show whether the test would be met on the central case. The Treasury believes on the cautious case finances will return to balance by 2008/09.

The ITEM Club issued a highly critical assessment of the Chancellor's forecasts that the public deficit will start to fall back next year as tax receipts return.

It said that even on the central assumption of above 3 per cent GDP growth next year and in 2005, the golden rule would be broken "perhaps as soon as 2005".

It said the Government would have to impose a tax rise of at least £10bn - equivalent to 4p on the basic rate of income tax - to restore the public finances to balance.

Professor Spencer said: "The Chancellor is in denial."