Tax rises push up inflation

TAX INCREASES announced in Gordon Brown's first two Budgets sent headline inflation to a six-year high last month, but also helped set the Government on course to run a budget surplus a year earlier than expected.

Official figures yesterday showed the price consumers are paying for the Iron Chancellor's prudence.

The headline retail price inflation figure jumped to 4 per cent in April from 3.5 per cent the previous month, returning to its highest since May 1992. The underlying measure, which excludes mortgage payments, climbed further away from its target to 3 per cent from 2.6 per cent.

Almost all of the increase in both cases was down to higher taxes - excise duties on petrol and a reduction in mortgage interest relief, along with council tax hikes. The remainder could be accounted for by items such as prescription charges and TV licences.

Inflation measured by the tax and price index - the broadest indicator of the cost of living, including all Budget tax changes - leapt from 2.6 per cent in March to 4.1 per cent last month.

A Treasury spokesman said: "A temporary rise in inflation was expected this month." He added: "Our forecast is for underlying inflation to fall back in July and to remain on track to meet the Government's inflation target over the forecast period."

Most City experts agreed that the rise in inflation will prove temporary, but there was concern that the higher headline rate will nevertheless feed through to wage claims.

James Barty at Deutsche Morgan Grenfell said: "The inflation rate will not stay this high, but it is unfortunate that this has happened when there is already upward pressure on wage rates."

The Bank of England's Monetary Policy Committee has made it clear that it will not alter interest rates to offset tax-related inflation changes. But shock figures last week showing a jump in earnings growth to just under 5 per cent revived uncertainty about whether borrowing costs have reached their peak.

Separate figures yesterday showed that buoyant tax revenues helped the Government repay pounds 3.4bn of the national debt last month, a much bigger repayment than expected. Tax revenues were nearly 11 per cent higher than the same month last year.

This surge reflected both the continuing strength of the economy and tax increases announced in the July and March Budgets. Income tax payments were up an astonishing 19 per cent year on year due to pay rises, and especially big bonuses. Higher petrol and tobacco duties boosted total customs and excise receipts.

However, the figures also revealed an equally striking picture on the government spending side of the budget equation. Expenditure by Whitehall departments was just 0.9 per cent higher than the previous April, implying a fall in spending in real terms. In fact, spending was actually lower in cash terms than it had been two years earlier.

The Chancellor has forecast a public sector borrowing requirement of pounds 2.3bn for the current financial year before a move into surplus in 1999/2000.

But even though only one month of the year has passed, most City analysts were predicting a surplus a year early. The impact of slower economic growth is unlikely to hit revenues until next year, and even if spending starts to rise in real terms the outlook for the government's finances looks rosy.

"The underlying picture is better than the official forecasts," said Adam Cole of HSBC Securities.