Brown should make this a Budget for simplicity

This is where the independent Bank of England earns its keep, as bogeyman
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There are two things certain about Gordon Brown's fiscal arithmetic, as he prepares for his trickiest pre-Budget report so far. One is that his surplus is larger than he forecast in the spring; the other is that he will not tell us the half of it. Any Chancellor likes to keep a few shots in the locker in the run up to an election, even one as adept as Mr Brown at the techniques of pre- and re-announcement. There will, after all, be another Budget show to finance before the earliest likely date for the general election. But this time there is another reason for caution. The bigger the surplus, the harder it is for Mr Brown to win the argument that he cannot afford to do much for the motorist.

There are two things certain about Gordon Brown's fiscal arithmetic, as he prepares for his trickiest pre-Budget report so far. One is that his surplus is larger than he forecast in the spring; the other is that he will not tell us the half of it. Any Chancellor likes to keep a few shots in the locker in the run up to an election, even one as adept as Mr Brown at the techniques of pre- and re-announcement. There will, after all, be another Budget show to finance before the earliest likely date for the general election. But this time there is another reason for caution. The bigger the surplus, the harder it is for Mr Brown to win the argument that he cannot afford to do much for the motorist.

Politically, Mr Brown will have to tread a path between inflammatory obstinacy and "giving way". Most readings of his character suggest he is more inclined in the first direction. But in his seven previous performances, he has always had a shopping list of measures to announce.

The air of Westminster is already heavy with (guided?) rumours of changes to capital gains tax, inheritance tax, stamp duty, council tax, special measures for small businesses, the countryside and urban areas. There is more-than-guided anticipation of a substantial response to the previous group of protesters, the pensioners' leaders. There is much unfinished business with respect to the fusion, or at least alignment, of national insurance, income tax and benefits. To tackle all, or even part, of this while ignoring the motorist would be a touch provocative.

The Government's strategy these past few weeks has been transparently clear: to try to alter the protesters risk-reward calculations by depressing expectations of tax cuts while waving the big stick. A certain clumsiness has resulted mainly in more queues at the pumps, of motorists whose exasperation is still largely directed at the Government. But Ministers have meanwhile been trying to win the political argument environmentally and economically as well.

Superficially, the first might seem easier to sell than the second, with global warming making its presence felt on our weather. However, trying to persuade people that high fuel duties are a way to avoid the floods in future is more inclined to annoy than to impress. Britain, after all, accounts for less than 5 per cent of global GDP. And most people are by now aware that we pay much higher fuel taxes than continental Europeans or Americans, who account for a far larger proportion of global economic activity and energy use.

What's more, fuel duties are not a very good way of denting our energy use, anyway. Petrol demand is not very sensitive to increases in price. To anyone living outside the cities, it is perfectly obvious why that should be the case: there is no alternative to the car. Finally, environmental holiness ill-suits a Government that has actually cut fuel duties on home heating, to a tiny fraction of the tax faced by car users, and shows no sign of spreading the energy tax burden more equitably across all uses.

But the real truth is that the Treasury loves fuel duties precisely because they do so little environmental good. Taxes that work, environmentally speaking, are not good money-raisers: if tax increases really put people off making the offending purchase, the exchequer ends up with less rather than more money. Increases in fuel duties, however, result in big increases in revenue - £22bn in 1999-2000 - and the take will be up a lot this year.

The scale of the Government's dependence on fuel duties is important, because the central economic argument concerns its overall fiscal stance.

It is easy enough (well, easier) to persuade the public that you cannot afford something when government is in the red. Managing expectations when you are so clearly in surplus is more difficult. As the chart shows, the Government has been attempting to do this by projecting forecasts that show public finances swinging back into deficit in a couple of years' time. When things turn out better than this, the Chancellor can have a "giveaway" Budget while still ending up with a number better than he first thought of.

If, however, people know that this is what the Chancellor is going to do, he loses the initiative. The Opposition gets in first with proposals for more spending (the Liberal Democrats) or lower taxes (the Conservatives). And the Chancellor's criticisms of their extravagance are treated with a certain scepticism. As it became clearer that his revenues were rising, expectations followed suit. As the National Institute for Economic and Social Research points out in its latest review, higher oil prices actually mean lower, not higher, government revenues in the medium term. In the short term, however, revenues are increased. So why, motorists argue, can't he simply give them the money back? This is where an independent Bank of England earns its keep, as bogeyman.

For the past three months ministers' most convincing "line to take" has been that Budget giveaways would result in higher costs for home buyers.

Whatever the real size of the Budget surplus, in the Bank's eyes the economy is operating close to the edge of inflationary pressure. The Bank has hung out against interest rate increases since February - in the face of some criticism. A seriously expansionary pre-Budget report would bring the hawks out again.

As in the previous Budget, the Chancellor does have a few billions up his sleeve. He can increase his scope by switching things around a bit. He could raise the taxes paid by oil companies and cut them at the pump, though the overall effect on motorists would be small. He could rejig Vehicle Excise Duty, to help country dwellers or encourage the use of fuel-efficient cars. It is, after all, much easier to have an environmental impact by acting at the point where consumers have a good deal of choice (which car to buy?) than when they have barely any (whether to fill up the petrol tank?). The danger, however, is that he will try to take the political track by another bout of extensive economic tinkering.

Mr Brown's excellent macroeconomic record is seriously undermined by his Heath Robinson approach to taxation. The cumulative effect of his previous budgetary attempts to micro-manage the economy has been to bring parts of the tax system close to breaking-point. He has been consistent in his focus on the need to increase Britain's productivity but - sadly - equally consistent in his faith in complexity. The fact that productivity has actually slowed down since the early 1990s should give him pause for thought. Over-complication does not merely burden business (a message he is likely to hear loud and clear from the Confederation of British Industry this week); it blunts or destroys the economic incentives his advisers imagine they are creating.

The difficult juggling act required of him this week must increase the temptation to use all the fiscal magician's arts. A certain admirable obstinacy must equally make him reluctant to abandon his chosen measures.

But this is a time for focus. Pensioners and rural motorists are genuinely feeling the pinch. For the rest, the best thing Gordon Brown could do for the British economy would be to make this a Budget for simplicity.

Sarah Hogg is chairman of Frontier Economics

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