Surge in tax revenues puts Chancellor back on track to meet his golden rule

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The Independent Online

The upturn put the Chancellor, who was 55 yesterday, on track to hit his cherished "golden rule" and alleviated the need for any rise in taxes in next month's Budget, analysts said.

But some of the shine was taken off the figures because of a separate decision by the Office for National Statistics to reclassify some £5bn of debt held by London and Continental Railways into the public sector (see box).

The Treasury took in £21.1bn more in cash receipts than it spent last month - the biggest surplus since modern records began in 1984, the ONS said.

Public sector net borrowing, which irons out volatile monthly moves, also showed a record surplus of £12.6bn in January, up almost £4bn on the same month last year.

It left the deficit after 10 months of the financial year at £29.8bn, lower than it was at the same stage last year and on track to meet Mr Brown's forecast of £37bn with just two months to go.

The current budget deficit so far this year - which excludes long-term investment spending and is the test for the golden rule - came in at £10bn, a shade under the budget forecast of £10.6bn. "All in all, it looks like the Chancellor will achieve his forecast for the current deficit - the first time he has hit his fiscal deficit forecast since Budget 2000," said Professor Peter Spencer of York University.

The driving force behind the surpluses, which were much higher than expected by City economists, was a 14.4 per cent jump in central government receipts.

Corporation tax revenues surged by 52 per cent, although some of that was influenced by a switch in the timing of North Sea oil taxes.

Income tax posted a 19 per cent rise on the back of City bonuses, while VAT recorded an 11.5 per cent surge compared with January last year.

Overall receipts have grown 7.8 per cent over the 10 months compared with a Budget forecast of 7.6 per cent. Spending also came in above forecasts, 5.8 per cent versus 5.4 per cent.

Allan Monks, a UK economist at JP Morgan, said: "It appears increasingly unlikely that the current fiscal position will change the Chancellor's tax or spending plans at the Budget next month."

The Treasury said the figures underpinned its long-held view that it would continue to meet its golden rule to borrow only to invest over the economic cycle. One Whitehall source said that with two months to go no one was "crowing about the figures".

While the figures would undoubtedly have pleased the Chancellor, analysts said the improvement did little to alter their concerns over the long-term health of the public finances.

Last March Mr Brown said he would move corporate tax due dates for North Sea oil companies to place them more in line with petroleum revenue tax. The Treasury was always on track for a bumper year for North Sea oil receipts - even before the Chancellor used December's pre-Budget report to raise tax rates on oil companies.

Professor Spencer, who is the economic adviser to the ITEM Club economic model, said January's surge in VAT receipts had still left growth over the year to date languishing at 4.4 per cent.

"ITEM has consistently said that the big problems will come not this year but in 2006/07 [as] it is unlikely that another surge in oil prices will help the Treasury next year," he said.

"The slowdown on the high street is now beginning to subdue the growth in employment and earnings, which does not bode well for next year's receipts."