Public Finances: A red and green path to golden rule

Red and green may be an ill-advised fashion mix but Gordon Brown wore both colours with pride yesterday as he announced a £14bn package of increased borrowing and higher environmental taxes to fund extra investment in schools.

In fact, the pre-Budget report was classic Brown - he used sleight of hand to ensure he met his cherished "golden rule" on the public finances by raising the trend rate of economic growth and moving the timing of the economic cycle for the second time in 15 months.

Mr Brown showed that he had his eyes firmly fixed on the future as he used the little extra money he could raise for spending on education - the mantra of New Labour since it won power in 1997. "This is money that I could use for tax cuts but I say invest it in education," Mr Brown pointedly told Conservative MPs.

However, he stuck to his forecasts for a sharp slowdown in public spending from 2008 onwards, raising questions over how prime minister Brown would fund an ambitious policy agenda.

In the pre-Budget report, the Treasury was forced to admit that the public finances had turned a deeper shade of red since the Budget last March.

Mr Brown raised public sector net borrowing in the current financial year by £1bn to £37bn and added in £6bn higher deficits between 2007 and 2011.

Going forward, borrowing (with forecasts made in the 2006 Budget in brackets) will fall to £31bn (£30bn) for 2007-08; £27bn (£25bn) for 2008-09; £26bn (£24bn) for 2009-10; and £24bn (£23bn) for 2010-11.

He insisted he would meet his golden rule of balancing the current budget across the economic cycle, both now and in the future. However, he raised the deficit for the current year by almost £1bn, and admitted the next year would post a £1bn deficit rather than reverting to a surplus as he had hoped in March. In total, the current budget will be worse by a total of £10bn by 2010.

Despite the higher borrowing, the Chancellor insisted he would meet the golden rule - to balance non-investment spending over the economic cycle - with £8bn to spare, down from the £16bn at Budget time.

One reason is that the Treasury has revised the length of the economic cycle for the second time in 15 months, this time cutting it back by up to two years. Previously it had been expected to end in 2009 but will now end early next year.

"With just three months left to run, it is now highly unlikely that the golden rule will be missed," said Robert Chote, director of the Institute for Fiscal Studies.

The Treasury said there was no political motive behind the move as it meant the economy would start a new cycle with the £1bn current deficit pencilled in for 2007-08. However Professor Peter Spencer, chief economist adviser to the ITEM Club economic model, said: "It means that if something nasty happens next year, he can say that there's still five years to go in the cycle.

"But going forward, the underlying position doesn't look as good as it did in the Budget, or frankly as they are signalling in the pre-Budget report."

Most of the extra tax comes with the leaked decision to double Air Passenger Duty from February, netting almost £3.5bn by 2010.

The rest comes in a host of moves to clampdown on tax avoidance.Economists said the report implied a tight squeeze on public spending going forward - although the final figures will not emerge until next summer's Comprehensive Spending that covers the years 2008 to 2011.

The Chancellor is forecasting that public spending will grow by 1.9 per cent above inflation between 2008 and 2012 compared with almost 5 per cent between 2000 and 2006.