Chancellor astutely mixes economics and politics, but the maths points to tax increases

It is politics, of course, but it is also economics. Gordon Brown has been at this game for a long while so it would be astounding were his latest, maybe last, Budget not politically astute. It is smart because it appears to be a modest "giveaway" in the sense that there are lots of small tax and spending benefits. But actually it tightens fiscal policy: on balance, it is slightly increasing taxation. It is hard to spot the tax increases because they are tucked away. How people read that, how they respond politically, we will know more in a couple of months at the general election.

The economic response takes longer and is dependent not just on what we do in Britain but how the rest of the world economy develops. The world is in the middle of a global boom - fastest growth for 20 years - so it would be odd were the UK not to be doing all right. (True, Germany and Japan are not doing well but that is because of weak domestic demand, for their exports are booming.) That strong UK growth has enabled the Chancellor to deliver his promise to increase public spending and also stay within his fiscal rules.

Or at least more or less to stay within them, for the assumptions on which the sums are based are a bit hairy, as the professional observers have said. This is not politics; it is maths. The International Monetary Fund in Washington and the Institute of Fiscal Studies in London reckon there will have to be tax increases of the order of £10bn a year to fund spending plans. Neither of these organisations are anti-Labour politicised bodies. They are just professionals looking at the numbers and making a judgement.

Behind this Budget, indeed behind the economic boom the UK has experienced, lie three questions. The first is whether the British economy has indeed been doing as well as Gordon Brown yesterday proclaimed, and if so why? The second is whether that performance - and the tax and spending plans based on it - will be sustained? And the third is whether the extraordinarily detailed, top-down micro-management by the Treasury of the nation's affairs is really successful, or what people want?

The answer to the first - are we doing well? - is yes. We have been lucky the skills needed in this "knowledge economy" seem to be ones the UK has been able to generate. That is thanks partly to language (all the English-speaking economies are doing well), partly education (Britain has two of the top 10 world universities and four of the top 30), and partly the strong cultural and creative base.

We have also been lucky in that Britain is the only large developed economy that is a net exporter, just, of oil; Canada, a much smaller economy, is the only other. That is very useful at a time of oil squeeze, such as the present, not least because of the extra tax revenue it can bring in.

But as well as being lucky we have also been hard on ourselves: the unpleasant structural reforms we went though in the 1980s laid the basis for the growth that started in the early 1990s and which continued since under both parties.

And to his great credit, Gordon Brown has bolted on to these underlying strengths the gift of macro-economic stability. The independent Bank of England, the counter-cyclical fiscal policy, the stable pound (much more stable than either the euro or the dollar); he should take a bow for this. But will it continue? The underlying strengths will pull the economy along for a while. Eventually, other countries will pare back these advantages; Germany has begun a long and painful process of reform. But for the time being our underlying advantages continue.

The danger is that the counter-cyclical policies will be harder to sustain. The UK economy is like a bicycle. Keep pedalling, with growth at 3 per cent and tax revenues rise by just about enough to support higher spending, which boosts growth. But were the economy to slow, say, in a house-price decline, the bicycle would start to wobble. Then tax revenues would fall, growth would fall, unemployment would rise and so on. That is what happened in Germany and Japan and there is concern there will be wobbles ahead for the UK too. The Chancellor dismissed those concerns. OK, he has been right so far. But he has been lucky; the margin of error on public finances has become thinner and thinner.

UK consumers have been lucky too. We have sustained very large increases in our standard of living, as the Chancellor reminded us, but we have borrowed hard to do so. Our households are still saving, just, and those borrowings have been supported by a rise in home prices. But we have to some extent borrowed for the future. So it may be harder to keep pedalling. And the final question: how well does the Treasury micro-management of public finances work and do we want it? Well, on the official figures the efficiency of the public sector has been disappointing. In fact it has been getting worse. Compared with other countries, according to the OECD, the British Government is middle of the pack, not the worst, but not impressive. So if you believe the numbers, the boom in public spending engineered by the Treasury has been a bit of a disaster. That is not entirely fair because measurement of public sector output is a black art, and the UK is trying as hard as any other country to improve the data. But it is a worry. Everyone wants better public services and governments need revenue to provide these but if people feel their money is being wasted, they are liable to react badly.

That brings the debate back to politics. Gordon Brown has made a centralised public sector even more so. It is odd that it should be a chancellor's decision whether older people should have free bus passes. For most countries, that would be taken at a much lower level. We have - or maybe have had - a broadly competent Chancellor; we have an extremely lucky one, but my word, what an extraordinarily bossy one too.