IFS applauds Chancellor's hat-trick

Budget analysis: Business gains and public finances are kept on prudent course, say institute's experts

GORDON BROWN appeared yesterday to have pulled off an enviable hat-trick, with a Budget that kept the public finances on a prudent course, made most people better off, and on balance helped rather than hindered business.

The Institute for Fiscal Studies yesterday gave each of these aspects of the Budget a cautious welcome, although with stronger reservations about the Chancellor's measures to boost enterprise.

The IFS described their likely impact as "very minor" and unlikely to boost British productivity. Tuesday's Budget followed two that raised corporate taxation. However, its analysis confirmed that the changes in personal taxation and excise duties left many more gainers than losers; overall, each tenth of income distribution would gain when all the measures came into effect, some low-paid households by nearly pounds 4 a week but the richest by less than pounds 1 a week.

Within each group, 10 to 15 per cent of households lose out, except in the top group where about a third are losers. Smokers, drivers of big cars and childless families are more likely to be in that minority.

Higher tobacco excise duties were the only measure to hit any group significantly. That impact is concentrated on the lowest-paid two-tenths of the population, which has more smokers. All types of families with children - lone parents and one and two-earner households - would gain.

The IFS's analysis confirmed that Mr Brown should continue to meet both his fiscal rules - that the current budget should balance over the business cycle, and that borrowing should be low enough to keep the Government's debt stable.

Carl Emmerson, an economist at the IFS, said the public finances were still sustainable after the Chancellor's latest tax cuts, although with a smaller margin of error, despite the fact that the IFS's forecast for economic growth is lower than the Treasury's prediction of 1 per cent this year.

The rather weaker IFS forecast for GDP does mean, however, that it foresees a rise in the overall tax burden as a share of output, whereas the Treasury is expecting a decrease in 1999/2000. However, the tax increases that have raised the tax share since Labour's election were announced in Mr Brown's first two Budgets, not yesterday.

According to the Budget Red Book, the measures announced yesterday cut taxes by pounds 1bn in 1999/2000, pounds 1.4bn in 2000/01 and pounds 3.6bn in 2001/02. Measures announced in previous Budgets raise taxes by pounds 3.7bn in the first year, pounds 5bn in the second and pounds 7.7bn in the third. Higher fuel duties and the cash-flow effect of changes to the payment of corporation tax account for most of the net increases in the pipeline.

The Chancellor insisted yesterday that he had not made it harder for the Bank of England to cut interest rates further by loosening fiscal policy. "Our fiscal stance is tighter than in November, and that's clearly something the Bank of England will want to look at," he said.

He said the current surplus predicted in the Budget was higher than in November's Pre-Budget Report, amounting to pounds 34bn over the next five years.

However, another analysis from accountants PricewaterhouseCoopers suggested that public sector borrowing could soar to more than pounds 40bn by 2001/02 if the global economy tips into recession. Even a mild UK recession of the type forecast by many economists could see the public finances take a turn for the worse. "The Chancellor is taking a calculated gamble on the public finances," said John Hawksworth at PwC.

Using the growth projections outlined by Mr Brown, PwC calculated that the golden rule - only borrow to invest - will be met and net borrowing will total pounds 7bn in 2001/02. This is rather more than the pounds 1bn forecast by the Treasury. "Even on their own rosy assumptions, the Treasury's projections look a little over-optimistic," said Mr Hawksworth.

If there is a mild recession, and UK growth grinds to a halt this fiscal year, matters look less promising. PwC calculates that net borrowing could top pounds 20bn by 2001/02 and the golden rule will be comprehensively broken. The current Budget - which must balance over the cycle if the rule is met - would be more than pounds 30bn in deficit over the next three fiscal years.

In its global recession scenario, global growth is seriously hit by a slowdown in the US. The impact on public finances could be catastrophic - a borrowing requirement of more than pounds 40bn in 2001/02 alone, and a three- year current budget deficit approaching pounds 60bn.