Tax revenue surge cheers Chancellor

There was welcome news for the Government yesterday from figures showing that the public finances were in surplus in the last month before the election. Buoyant tax revenues mean the Treasury will be able to reduce its target for this year's public sector borrowing requirement (PSBR) in the Budget next month.

In a speech to the Confederation of British Industry tonight, Gordon Brown will promise to be tough on public spending and borrowing. He will say: "In my first Budget I will be looking to the long-term needs of the British economy. I will set tough rules for government borrowing and spending. I will publish a plan for deficit reduction over the medium term."

Yesterday also brought a survey showing consumer confidence has surged to its highest level for nine years in a bout of post-election euphoria. By far the biggest improvements occurred in Scotland and Wales, the two regions which voted all their Conservative MPs out of office.

The monthly survey of consumer confidence carried out by GfK for the European Commission shows a big jump in optimism about the economy and household finances in the fortnight immediately after the general election. The balance of optimists over pessimists was, at 6 per cent, the highest since August 1988.

Commenting on the results, Ben Sanderson of Nottingham Trent University said: "The latest survey suggests that New Labour means new confidence."

He said the figures indicated that consumers would probably spend rather than save the free share handouts from building societies this summer. Nearly a fifth said they planned big purchases during the next 12 months.

On top of this return of the feelgood factor, the run of favourable economic news inherited from former Chancellor Kenneth Clarke continued yesterday.

New figures showed that government revenues exceeded expenditure by pounds 36m in April. City experts had expected a shortfall of more than pounds 1bn.

Although caution is needed in drawing conclusions from the first month of the financial year, the trends suggest that the PSBR for 1997/98 could be much lower than the pounds 19bn forecast in last November's Budget.

The Treasury said special factors helped explain April's surplus. The sale of Ministry of Defence married quarters and the Housing Corporation loan book brought one-off reductions of pounds 700m each. The switch to quarterly VAT payments on account accounted for up to pounds 1bn of the pounds 1.4bn in total VAT receipts compared with last April.

A spokesman said the Chancellor was determined to see significant further progress before he could be confident that the public finances were on a sound long term footing.

Even so, yesterday's figures diminished expectations that Gordon Brown will opt to raise extra taxes in his first Budget, due next month.

"A significant downward revision to the Treasury's PSBR forecast in the forthcoming Budget seems certain," said John O'Sullivan, an economist at NatWest Markets.

Excluding the one-off asset sales, central government spending was about 1 per cent higher than a year earlier, well on target to meet the tough public spending plans set out in the last Budget and adopted by the new Government.

Tax revenues were 12.5 per cent up on the year, well ahead of the Treasury forecast. Apart from VAT, income tax and national insurance contributions are growing strongly, reflecting rising in employment.

There is clear evidence that the public finances are benefiting from the strength of the economy," said Jonathan Loynes at HSBC Markets. But he said borrowing remained too high for this stage of the economic cycle.

Comment, page 21