'Slash and spend' as key tax rates unchanged

It was not so much a "tax and spend" Budget as "slash and spend". Gordon Brown rejected significant tax increases in the run-up to the next election, instead opting to find extra money by cutting back office operation.

The Chancellor's decision to leave his borrowing forecasts virtually unchanged masked a huge change in his strategy in balancing the books.

Despite unveiling plans for extra spending over the next three years, the Chancellor kept most tax rates unchanged and dipped only marginally into the debt markets.

Instead of raising taxes to pay for spending, he unveiled an ambitious plan to cut £20bn a year of Whitehall waste by 2008 - equivalent to raising the basic rate of income tax by 6p in the pound.

In a Budget speech that revealed much of the contents of this summer's spending review, he confirmed health spending would grow 7.2 per cent a year while education would enjoy 4.4 per cent growth.

According to the Institute for Fiscal Studies the rest of Whitehall will see a rise of 1.4 per cent - a real terms cut.

The Chancellor committed to increase spending on defence, the home office and transport in real terms and to housing, local government, children and the elderly in cash terms.

"This could constrain the allocations to remaining departments," said Chris Frayne, an Institute for Fiscal Studies analyst. "The Chancellor will have a difficult job reconciling the squeeze in non-NHS and education current spending with his policy aspirations."

The Government will now borrow just £3bn extra over the next five years on top of the £81bn extra cumulative borrowing he announced in the previous three budget reports.

Yesterday's Budget contained a minor give-away of £725m - of which more than half was an extra £100 for pensioners and the rest due to a freeze in excise duties.

But even his new forecasts were still several billions less than the City had forecast and speculation mounted that Mr Brown will have to raise taxes.

The Treasury's own survey published last month show the average prediction is £37.7bn for the 2005-06 tax year.

The Chancellor insisted the Government would meet its golden rule to balance the public finances and would start the next economic cycle in surplus - to the consternation of most City economists.

While December's performance-based rating (PBR) cut the size of the margin from 0.5 per cent of GDP in the Budget to just 0.2 per cent or £14bn, yesterday's report showed that he would scrape in by just 0.1 per cent of GDP or £11bn.

"Having accumulated surpluses at the start of the economic cycle, we meet the golden rule. Indeed we have an average annual surplus over the whole cycle," the Chancellor told the House of Commons.

Economists in the City were more cautious. "Whether the Chancellor will meet the golden rule is now a moot point," said Simon Rubinsohn, chief economist at Gerrard stockbrokers. "At the very least it is clear that the Chancellor has little more room to play with if this target is to be observed."

The Chancellor said public sector net borrowing (PSNB) for the tax year ending next month would be £37.5bn rather than £37.4bn forecast in December last year when he scrapped the optimistic Budget 2003 forecast for a £27bn shortfall.

Going forward, the PSNB, with PBR forecasts in brackets, falls to £33bn (£31bn) next year, £31bn (£30bn) in 2005-06, £27bn (£27bn) the following year and £27bn (£27bn) for 2007-08. For the first time he unveiled a forecast for a £23bn deficit for the 2008-09 fiscal year.

However, few in the City believe the Treasury will enjoy a return to pre-boom levels of tax receipts. The Government forecasts a 5.9 per cent rise in revenues this year, but the most recent figures for the first 10 months of the year show growth rates of 5.5 per cent.

Analysts are more worried about the longer-term forecasts. They believe the Chancellor will fail to hit his targets for tax receipts. The Budget "red book" show the tax take as a share of GDP rising in a straight line from just under 36 per cent now to 38.2 per cent by 2009.

But as Michael Saunders, an economist at Citigroup, points out: "In the past such revenue buoyancy has only occurred when taxes rose and at the peak of the late 1990s equity mania when tax revenues gained from big rises in capital gains tax, financial company profits and City bonuses. Neither source of revenue buoyancy is in place yet."