Budget `97: A Budget for the people

Gordon Brown yesterday delighted Labour and depressed the Tories with the promise of an extra pounds 3.5bn for schools and health spending in "a people's Budget for Britain's future".

Keeping firmly to his pre-election promises, he set his sights on stability, investment, employment, and opportunity. The Chancellor of the Exchequer told a crowded House of Commons that his first Budget advanced the long- term interests of the many, rather than the short-term interests of the few.

The Budget package included a pounds 5.2bn windfall tax to fund a welfare- to-work programme for the long-term unemployed, a cut in Value-Added Tax on domestic fuel and power bills from 8 per cent to 5 per cent, and an unexpected cut of two percentage points, backdated, in the main rate of corporation tax, to 31 per cent, which Mr Brown declared the "lowest ever rate in the UK."

But he disappointed a majority in the financial markets because he did not increase taxes on consumers as heavily as they had hoped and his Budget opened the door to further increases in interest rates - perhaps by as much as 1.5 percentage points to 8 per cent - leaving the short-term management of the economy to the Bank of England.

The biggest surprise in Mr Brown's new Budget box was the additional money for education and health, delivered by advancing the distribution of surplus reserves inherited from the Tory government.

That dividend is usually divided up in November, and the surprise, delight and relief of Labour ministers and MPs was genuine when Mr Brown concluded his Commons statement with a 1998-99 allocation from the reserve of an extra pounds 1.2bn for the NHS and pounds 1bn for schools.

Mr Brown then topped up that bonus with a further pounds 1.3bn for a five-year school modernisation programme, to be financed by surplus funds from the windfall tax that is to be levied on privatised utilities, including the gas, water and electricity companies, British Telecom, Railtrack and the British Airports Authority - but not British Airways.

While the Budget imposed additional taxes on tobacco and petrol, 10 million homeowners will have to find an extra pounds 10 a month from April next year when mortgage interest tax relief is cut from 15 per cent to 10 per cent. Mr Brown also raised stamp duty in two bands on sales above pounds 250,000 and pounds 500,000, which will hit whoever buys Tony Blair's pounds 615,000 Islington home.

Some economists praised the Budget for taking a genuinely long-term approach to tax and spending policy. "The Chancellor is saying, `I've bought a dog so I don't need to bark myself any more'," said Kevin Gardiner, UK economist at City investment bank Morgan Stanley.

A Bank of England spokesman said the fact that there had been some toughening of fiscal policy certainly helped ease the policy dilemma. Even so, the pound jumped by more than 3 pfennigs to nearly DM2.94, with many economists warning that base rates would now have to climb towards 8 per cent.

Although the Budget did raise taxes, the Chancellor was seen by many experts as having missed an opportunity to rebalance the economy. The Treasury's greatly reduced forecasts for government borrowing were mainly due to booming economic growth automatically boosting the tax take rather than the measures announced by Mr Brown.

In addition, most of the burden of his tax increases - pounds 6bn this year and nearly pounds 7bn next, including the windfall tax - will fall mainly on business.

Ian Peters, deputy director-general of the British Chambers of Commerce, said: "Our worry is that with limited measures to rein in consumer spending, interest rates will have to rise and sterling continue to rise, further damaging prospects for manufacturers and exporters."

The abolition of the tax credit for pension schemes, raising nearly pounds 4bn next year, will be only partly offset by a pounds 1.4bn reduction in corporation tax. The National Association of Pension Funds said employers would have to find an extra pounds 50bn over the next 10 years to make up the resulting shortfall in pension contributions.

"Business faces a triple whammy of higher taxes, higher interest rates and a stronger pound," said Douglas McWilliams, director of the Centre for Economics and Business Research. The experts were also underwhelmed by the extra pounds 3.5bn the Chancellor found for health and education. It is the normal course for the reserve set aside for each future year to be allocated to the most urgent priorities as that year approaches.

William Hague, the new Tory leader, said it was a tax-raising Budget, in which the Government broke its election promises. "Anyone with a pension, anyone with an insurance policy, anyone who is working hard to build up a nest-egg for the future, will be hit by the windfall tax.," he said. Earlier, the Opposition leader had joined his shadow Chancellor, Peter Lilley, in demanding an investigation into Budget leaks - scornfully dismissed by Tony Blair

In his reply to the Budget statement, Paddy Ashdown attacked Mr Hague's "brass neck" for criticising somebody else for raising taxes. The Liberal Democrat leader greeted Mr Brown's decision to provide extra cash for education and health, saying: "Perhaps the most welcome thing is the abandonment of the departmental spending limits and ceilings for expenditure over next year, if not this."

The Liberal Democrats warned that they would vote against the Budget because the extra cash would be eroded by inflation - and there was nothing set aside to deal with this year's spending crisis.