Treasury attempts to dampen pre-Budget tax hopes

The Treasury has launched an aggressive campaign to dampen down expectations of deep tax cuts ahead of next week's Pre-Budget Report.

The Treasury has launched an aggressive campaign to dampen down expectations of deep tax cuts ahead of next week's Pre-Budget Report.

Senior officials attacked forecasts by City economists that Gordon Brown, the Chancellor, could have a Budget surplus of up to £20bn as "overblown numbers". They said the Government was determined to stick to its policy of long-term economic stability and would not be tempted to opt for a "short-term fix".

The Government is facing growing pressure to cut taxes for motorists and to increase the level of state pensions in order to placate two angry lobby groups that have inflicted serious political damage.

But on Monday, the Chancellor will tell the Confederation of British Industry's annual conference that he will not repeat the errors of the past and mistake a cyclical boom for a "structural" improvement in the economy.

He will tell delegates: "We are not going to seek easy short-term solutions or abandon the inflation target or relax our fiscal discipline or reach quick-fix or easy solutions. We are going to stay the course."

Treasury officials also hinted that the latest quarterly corporate tax returns in October, which have not yet been published, might be lower than the City has been assuming.

"You can't assume that the tax revenue will come in better than projected," said one official. "You can't just say after six months of the financial year to September that the fiscal position is clearly strong and we can afford to go on an irresponsible spending spree. That is barmy short-term economics."

Another said: "There are headlines to be grabbed from making extrapolations, but that's a dangerous game."

The Treasury also insisted it would stick to its official assumption for the public finances that the long-term trend growth for the economy was 2.25 per cent.

Whitehall has said it believes that the trend rate is closer to 2.5 per cent, but an official said yesterday: "We will only move the trend growth assumption on the basis of hard data."

He said the trend rate would remain set in stone for both the PBR and the Budget, but he declined to comment on whether a new policy could be issued ahead of a possible summer general election.

On Monday the Treasury is expected to publish a report on productivity, which must be improved if the economy is to accelerate.