Public Finances: Big tax rises have been put off - for now

The Iron Chancellor showed yesterday he has nerves of steel and a brass neck as he stuck to his boast he could get the public finances back under control in the face of an economic slowdown.

He admitted he would have to borrow a further £17bn over the next five years - despite a £2.5bn tax grab - but insisted that all the cash was being diverted into long-term investment. He even found some extra money to give the young and the very old.

He insisted he would meet his "golden rule", which allows him to borrow only to invest, although economists in the City warned he had only delayed the fateful day when major tax increases would be needed.

He unveiled a batch of new taxes on everything from oil rigs to landownings and blocked off loopholes. It seems the clergyman's son taketh with one hand and taketh with the other, too.

Mr Brown announced a number of moves that will be seen by voters as "victimless crimes" - levies on property owners, accountants' clients and oil giants.

The idea of a tax on property owners who reap a tenfold windfall when their project is granted planning permission was well signposted. And a further levy on the North Sea had received so much speculation that companies such as Shell and BP might as well have made a down payment at the Treasury in advance to curry favour.

In what has become an annual event, the Chancellor opened up another front in the fight against tax avoidance. In the Budget, he pencilled in savings of £660m by cracking down on eight schemes that, while legal, were intended to lower tax payments. By performing a U-turn on allowing people to put houses into their pension plan he managed to close a tax loophole before it opened.

But the big unanswered question - the elephant in the room - was whether headline grabbing taxes such as VAT or National Insurance would be go up in the next Budget to fill what sceptics say is a £10bn black hole. Experts broadly said yes - but not next year

The Chancellor said borrowing for the current tax year ending next March would be £37bn, rather than the £32bn he laid in the Budget nine months ago. Going forward, borrowing (with Budget 2005 forecasts in brackets) falls to £34bn (£29bn) in 2006-07, £31bn the following year (£27bn), £26bn (£24bn) for 2008-09 and £23bn (£22bn) for 2009-10. Finally, he issued his first forecast for the 2010-11 fiscal year, pencilling in a £22bn deficit.

More importantly, he doubled his forecast for the deficit on current spending -the day-to-day expenditure that counts against the golden rule - from £5.7bn to £10.6bn and by a further £12bn over the next four years.

With growth at a 10-year low and deficits running above targets set a few years back, few believe Mr Brown or his successor will meet the golden rule over the economic cycle that has just started.

It was hardly surprising, therefore, that the Chancellor chose to crow loudly over the fact he had met the rule - that the Government must borrow only to invest when averaged across an economic cycle - in the one and only cycle under Labour.

He said the current budget would be in surplus between 2008 and 2010 "meeting the fiscal rule in this cycle by more than £16bn in contrast to the deficit over the last cycle, 1986 to 1997 of £157bn".

That achievement has been tainted in the eyes of the Opposition and many in the City because of the Treasury's decision to retrospectively redate the start of the cycle by two years to 1997, at a stroke adding £10bn to the initial surplus.

Roger Bootle, a former "wise man" in the last Conservative government and now economic adviser to accountants Deloitte, said: "Without these adjustments, the Chancellor would be on course to break his rule comprehensively. I continue to believe that policy action, probably in the form of tax increases, will eventually be required to borrowing back down to acceptable levels."

Stephen Herring, a tax partner at BDO Stoy Hayward, said the key question was the timing of the tax hike as the PBR had signalled it would not come next March. "I have a nasty feeling the Chancellor may have pencilled in a significant hike in the VAT and National Insurance rates for the 2007 Budget," he said.

"He has little left in the kitty and spending is rising and planned tax receipts may easily fall short of what he needs."

Both spending and receipts have come in slower than expected this year. In the first seven months of the fiscal year, receipts have grown 7.4 per cent, compared with an 8.5 per cent target. That has been offset by a 4.1 per cent growth in spending, below the target of 5.6 per cent.

Warning of expected tax hikes, Howard Archer, UK economist at Global Insight, said: "Unless stronger than expected growth rides to the rescue in 2006, we believe that this is only postponing the inevitable."

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