Pre-Budget Report 2004

Gordon Brown's £2bn pre-election statement

Gordon Brown unwrapped a £2.2bn package of pre-election sweeteners yesterday that he shared among householders, working families with young children, pensioners and motorists.

In his pre-Budget report, the Chancellor pumped £1bn into holding down council tax rises next April, a month before the widely expected general election. He said increases should be "substantially below" this year's 5.9 per cent figure, but local authority leaders warned that the one-off subsidy would not prevent huge rises in future.

Mr Brown tried to scotch City forecasts that he would raise income tax or cut spending after the election because of a looming "black hole" in his finances. Tories and some independent analysts claimed there was a £10bn gap in his figures. The most eye-catching announcement was his pledge to create a "family-friendly welfare state" and "the most generous maternity support and support for young children ever in the history of our country". Paid maternity leave will rise from six to nine months in 2007, and eventually to a year, and will be transferable from the mother to the father for the first time. A 10-year plan for child care will include higher tax credits and the opening of 3,500 children's centres by 2010.

In his pitch for the pensioners' vote, Mr Brown announced an extra £50 on top of the winter fuel allowance, taking it to £250 for those over 70 and £350 for those over 80 from next winter. To head off a pre-election revolt by motorists, he gave up £665m of revenue by maintaining the freeze on fuel duties.

Mr Brown could not resist a sideswipe at his old foe Peter Mandelson, now a European commissioner, who accused the Chancellor last month of "exaggerated gloating" about the British economy.

Mr Brown told MPs: "'Inflation is low. Unemployment is low. We are growing faster than many other European countries'. Not, Mr Speaker, exaggerated gloating but the words of the Leader of the Opposition."

He insisted he would meet his much-trumpeted "golden rule" that borrowing would not exceed public investment over the economic cycle. His aides insisted there was "no black hole", saying City experts had underestimated government revenues from the oil industry.

Mr Brown conceded a slight deterioration in public borrowing for this financial year and next. But he stuck to an optimistic prediction that the economy would grow by between 3 and 3.5 per cent next year, even though the Bank of England expects it to be about 2.5 per cent.

Oliver Letwin, the shadow Chancellor, said: "The tide is going out on the Chancellor's credibility. The tragedy is that the Chancellor is spending and borrowing and taxing so much because he is not getting value for taxpayers' money." Vincent Cable, the Liberal Democrats' Treasury spokesman, accused Mr Brown of complacency and urged him to submit his figures to the National Audit Office to check whether his "golden rule" would be breached.

The Chancellor showed complete disregard for the siren voices in the City warning that the country was heading for a crisis in public finances.

Stephen Lewis, chief economist at Monument Securities, said: "Mr Brown has kept his eyes shut - his response to the worsening numbers is to ignore them. That's not surprising when a general election is in the offing."

The Institute for Fiscal Studies said the Chancellor was forecasting a £26bn rise in taxes over the next parliament, compared to the £16bn in tax hikes since 1997. Robert Chote, its director, said: "If tax revenues do not rebound of their own accord, then Mr Brown, or his successor, would need to announce fresh tax-raising measures to ... meet the golden rule."

City economists said the Government would have to hike taxes to fill a "black hole" - but not until after the election.

John Hawksworth, at PricewaterhouseCoopers, said: "The Chancellor is skating on very thin ice in claiming the [golden] rule will definitely be met. He has no margin for error left."

The Chancellor admitted receipts from the struggling business sector would come in more than £3bn short this year, but filled the gap by forecasting an extra £2.6bn from higher oil-related revenues and other tinkering with the forecast.

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