Sleight of hand fails to hide gaping holes in public purse

It was never going to be a classic giveaway Budget, but Gordon Brown still managed find enough tax ruses to hand more than £1.4bn to voters.

It was never going to be a classic giveaway Budget, but Gordon Brown still managed find enough tax ruses to hand more than £1.4bn to voters.

The Iron Chancellor became Gordo the Great Magician, using sleight of hand, illusion and conjuring tricks to show that - in defiance of political folklore - he has actually tightened the purse strings just 50 days ahead of a likely general election.

But he did nothing to assuage or even acknowledge mounting concerns that he is merely delaying multibillion-pound tax rises on voters soon after polling day. His only concession to the state of the public finances was to resist the temptation to splash out £3.5bn on a pre-election cut of a penny on income tax.

If anything Mr Brown made a virtue out of a necessity; he has almost no money left in the bank, so he gave little away. As widely expected, he handed tax cuts to young homebuyers, working families with children and pensioners, even buying them free bus tickets. To pay for this he slipped in a change to North Sea oil that nets him £1.1bn - paid back over the next three years - and pencilled a further £650m of savings by closing tax loopholes.

But he did nothing to address the big issue that separates him from almost all independent commentators: that his optimistic medium-term forecasts on growth and tax revenues mask the need for a £10bn tax hike. The Chancellor insisted he would meet his golden rule to balance the public finances when averaged over the economic cycle. But he cut the margin of error from £8bn in December to just £6bn.

"With our deficits lower than our competitors, lower than a decade ago - and with our debt lower than our competitors and lower than a decade ago - we are meeting both our fiscal rules in this economic cycle and the next," he told MPs

But this cut little ice outside Whitehall where analysts said he had not addressed a structural black hole in the public finances. Martin Weale, director of the National Institute of Economic and Social Research, said: "The Government has been slow to recognise the way in which the fiscal position has worsened over the last year."

The Chancellor said borrowing for the tax year ending next month would be £34.4bn, almost unchanged from the £34.2bn he forecast in December's pre-Budget report. Going forward, borrowing, with PBR forecasts in brackets, falls to £32bn (£33bn) in 2005-06, £29bn the following year (£29bn), £27bn (£28bn) for 2007-08 and £24bn (£24bn) for 2008-09. Finally he issued his first forecast for the 2009-10 fiscal year, pencilling in a £22bn deficit.

More importantly, he raised his forecast for the deficit on current spending by £3.5bn to £16.1bn, but cut it by £1bn in 2006-07, the final year of the cycle. "The shortfall is now expected to fall by £10bn rather than £5bn," said Simon Rubinsohn, chief UK economist at fund managers Gerrard. "It is hard not be a little sceptical about the extent of improvement projected."

The Chancellor made the numbers add up by cutting spending growth to 5.9 per cent from 6.6 per cent and raising revenue growth to 8.5 from 7.2 per cent. Malcolm Barr, UK economist at JP Morgan Chase, said Mr Brown had ignored all his recent fiscal forecasts that had turned out worse than expected. "If we get prolonged sluggish growth then I think we would find the fiscal rules would force the Chancellor to raise taxes despite having sub-par growth," he said.

The Chancellor stuck with his forecasts for economic growth over the next three years, not even bothering to waste words dismissing the gloomy outlook from City and academic commentators.

GDP growth in the current year will be within a range of 3 to 3.5 per cent, followed by 2.5 to 3 per cent next year and 2.25 to 2.75 per cent. The new forecasts still leave the Treasury far more optimistic than independent experts at City banks or in academia. The latest survey of economists by the Treasury published on Tuesday showed average independent forecast for growth this year is 2.6 per cent followed by 2.3 per cent in 2006.

Economists said the Treasury was betting the Bank of England would not start implementing rate rises that could halt the strong economic growth Mr Brown needs for the public finances. Andrew Smith, chief economist at KPMG, said: "The Chancellor is relying on the Bank to blink first, as last year. Mr Brown needs robust economic activity to meet his financial projections, but the Monetary Policy Committee [which pulls the interest rate lever] suspects continued above-trend growth will fuel inflation."

The Chancellor challenged his critics to prove him wrong andderided the Conservatives. "The Budget forecast for 2004 of growth at or above 3 per cent was said to be a deliberate misrepresentation of Britain's economic position," he said. "Not to meet it, it was said, would destroy credibility [but] I can report that growth in 2004 is as forecast: 3.1 per cent."

Every year, Britain's record economic performance under Mr Brown appears to improve by 100 years. Last year the Chancellor hailed the unbroken run of growth as the best since the Industrial Revolution. Yesterday he went further. "Britain is today experiencing the longest period of sustained economic growth since records began in the year 1701," he said.

In a reference to Arsenal's now-broken run of 49 matches without a loss, Mr Brown said the UK had gone one better with 50 successive quarters of growth, cunningly pulling a magician's cloak over the fact that 15 of those quarters were achieved under the Tories.