Pre-Budget Statement: Public Finances: Surplus to total pounds 46bn over next four years

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The Independent Online
EVEN GORDON Brown admitted there would be a little extra in the kitty during the next few years, revising his estimates of likely government revenues compared with March's Budget. But the Chancellor was less optimistic than many outside forecasters, basing his predictions of future tax revenues on cautious assumptions.

There is no single bottom line in the public finances, but the closest thing to it is the figure for public sector net borrowing (PSNB). Thanks to the economy's better than expected performance, Mr Brown was able to revise down his estimates of how much the Government will need to borrow.

In fact, he is predicting a surplus of revenues over spending this year and for the next two before returning to a small deficit in 2002-03 and 2003-04. There will be a debt repayment of pounds 3.5bn this year and pounds 3bn in the two following years, and small borrowing requirements of pounds 1bn in 2002- 03 and pounds 4bn in 2003-04. This represents an improvement of pounds 6.5bn in net borrowing this year, compared with the forecasts he made in March, tapering off to an unchanged forecast for 2003-04.

The surplus on the current Budget will amount to pounds 9.5bn this year rising to pounds 11bn next year and pounds 13bn in the following two years. These exceed the previous estimated surpluses by similar amounts.

The Chancellor has stuck to far more cautious estimates than many City forecasters for future years. Some are putting the potential surpluses as high as pounds 10bn on current policies.

"Chancellors should not delude themselves, it's sensible to be cautious," said Geoffrey Dicks of Greenwich NatWest. But he added: "There is obviously an element of bargaining in these figures." David Owen at Dresdner Kleinwort Benson said: "There is definitely a war chest building up here. The markets do not believe these debt repayment figures."

Confusion abounds partly because there are so many summary figures. The borrowing total can include or exclude the windfall tax revenues. The Government also presents the sums that will be spent on the working families tax credit as negative revenue rather than positive spending - just as the Conservatives presented privatisation revenues as negative spending rather than positive taxes.

Certainly, the new presentation of the figures can make readers feel there is such a thing as too much transparency. A Treasury guide to analysing the public finances, published alongside yesterday's pre-Budget report, contained a six-page glossary of terms.

However, the basic, prudent principles of tax and spending policies are unchanged. The code for fiscal stability passed a year ago requires the Chancellor to satisfy two rules.

The "golden rule" says the Government can only borrow to invest; in other words current, day-to-day spending must balance revenues over the course of the business cycle. Surpluses in good times are therefore needed to offset deficits in bad times, and Mr Brown has pencilled in a comfortable surplus for the next five years.

The "sustainable investment rule" caps borrowing overall by saying net public sector debt must be stable over the cycle at a level preferably below 40 per cent of GDP.

As the Treasury puts it: "Fiscal policy is now directed firmly towards maintaining sound public finance over the medium term, based on strict rules. Where possible it supports monetary policy over the economic cycle."

There are ways to take this basic prudence further. Mr Brown does so, although it is precisely this caution - certainly compared with some City forecasts - that lays him open to the charge of building up a pre-election war chest. Nevertheless, the forecasts of tax revenues and total expenditure are based on the assumption that the economy's growth will average 2.25 per cent a year. This is below the 2.5 per cent trend identified in a recently published Treasury paper.

The separate paper published yesterday emphasises that the fiscal projections in the pre-Budget report have a completely different status from those in the Budget. Yesterday's new forecasts are updates that take account of changes in the economy rather than a new statement of policy.

The paper also spells out the Treasury's assessment of the impact of fiscal policy. The overall impact is captured in the change from year to year in the PSNB. If it falls, policy is getting tighter. Adjusting this measure to remove the impact of "automatic stabilisers" such as the fact that tax revenues rise and benefits fall as the economy expands gives the cyclically adjusted PSNB. This measures what the Treasury calls the change in the fiscal stance, the result of policy measures. It is the best measure of the real economic impact of the government's decisions.

Last March's Budget showed there was a big tightening in the fiscal stance, amounting to 3 per cent of GDP between 1996-97 and 1998-99. The old plans then had little change - perhaps a mild tightening - pencilled in for the following five years.

The new figures show very little change in the cyclically adjusted PSNB, indicating that the higher actual debt repayments mainly reflect the better performance of the economy. The golden rule means that surpluses in good times have to be banked to cover deficits in bad times. However, even here the Treasury projections build in some caution. They assume the economy can grow at just 2.25 per cent a year on average, requiring a bigger cushion of surpluses when the economy grows at a pace faster than that.

Yesterday's report played down the public sector net cash requirement, which used to be known as the public sector borrowing requirement. Its importance as an economic indicator dates from the days of monetary targeting, but the City still uses the figure to estimate how much gilt-edged stock the Government will need to sell. The result of Mr Brown's passion for prudence is that gilts will continue to be in short supply, especially long-term stocks, which pension funds need to meet their minimum funding requirements.

Diane Coyle

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