Outlook: Boom will not last for Brown

It should perhaps come as a surprise to learn that Gordon Brown has been tougher on public spending than Kenneth Clarke, but somehow it doesn't. Where Mr Clarke a year ago revised up his forecast for the current year's PSBR from pounds 15bn to pounds 19bn, his successor is likely to revise his down from pounds 11bn to pounds 9bn. The scale of the boom has exceeded all expectations, explaining part of the Brown improvement. But more important is the fact that central government departments are so far spending less this year than they were last. The new Chancellor does indeed seem to be made of iron.

It won't last. The economy will start to slow next year. In addition, the pressures for higher public spending so widely discussed during the election campaign have not vanished in the new dawn. Pay is one issue. The only reason economy-wide average earnings look so favourable despite falling unemployment is because of the public sector pay freeze. The time will come when nurses, teachers and council officials have to be awarded a decent rise.

Nor will the Government be able to escape spending more money on health and education. Yesterday's news of bigger and longer NHS waiting lists can only have reinforced the new Government's concern about this political and fiscal timebomb. For all Gordon Brown's determination to reallocate money within the total and make savings on efficiency, the Government cannot hope to meet the public's expectations through this route alone.

The Chancellor will undoubtedly want to stick to his own golden rule on the government budget, with borrowing limited to the amount of public sector investment over the course of a business cycle. Mr Brown is so determined to be fiscally prudent that he plans to legislate for borrowing rules.

So how is he going to accommodate these growing pressures on spending? One obvious solution would be to fudge it - to redefine public investment to include some health and education spending after the results of the "Comprehensive Spending review" are announced next summer. This would give extra leeway on borrowing. The trouble with this approach is that the City would see it for what it would be, a tricky sleight of hand.

The more likely solution, then, would be for the Chancellor to resort to a mix of asset sales and high taxes. There's nothing left of the family silver now, but there is still the odd pewter mug lying on the back shelf that might hold a car boot sale price. Rather more promising is the scope for raising taxes. Inevitably this is where the real squeeze is going to come.

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