Politics: Buoyant economy gives Brown cash to play with

The rapid fall in unemployment during the summer has delivered a pounds 1bn windfall to government coffers. Diane Coyle, Economics Editor, considers how Gordon Brown might spend it.

The number of people claiming benefit is already a quarter of a million lower than at the time of Gordon Brown's July Budget, and the drop in joblessness will allow him to present a much brighter outlook for the public finances in his "pre-Budget" statement to the House of Commons next week.

The Chancellor will be able to announce a reduction in his targets for government borrowing, or - if he wishes - find some extra money for the hard-pressed National Health Service this winter.

The Treasury is keen to downplay, for now, the scope for increased spending in order to keep the lid on bids from the spending departments. Mr Brown has pledged to stick to the public spending total for this year and next, set by his Conservative predecessor.

However, he has already found extra funds for health and education. In July, he cut the "contingency reserve" - the money in the spending plans not earmarked for particular departments - by pounds 2.2bn, dividing the money between health and education. Last month, the defence budget was raided to fund a cash injection for NHS.

In addition, the National Register of Assets due to be unveiled this week has revealed a wide range of government properties that will be sold to raise money for high-priority public services.

As well as national treasures like valuable works of art, the survey has uncovered land and buildings that will be sold off during the next few years.

The strength of the economy since Labour came to power means that almost all City commentators expect the Chancellor to be able to better his pounds 11bn target for the Public Sector Borrowing Requirement in the current year by pounds 2bn or more. Lower unemployment, tough spending control and higher tax revenues have contributed to this performance.

David Owen, an economist at investment bank Dresdner Kleinwort Benson, said: "The public finances are in better shape than anybody expected a few months ago, although they will stop improving as the economy slows next year."

Even if the Treasury decides to be cautious about its forecast for future tax receipts, the convention of assuming that unemployment will stay at a constant level will give Mr Brown pounds 1bn leeway compared with July. Although, formally, spending on benefits for the jobless is counted outside the expenditure planning total, the saving on social security payments could be spent without breaking the pledge on sticking to the planning total by releasing more money from the reserve.

The "pre-Budget" statement next week is intended to set out the background for decisions to be announced in the Budget proper in March, and will not include a new set of public spending plans. However, it will set out the Treasury's updated forecasts for the economy and the state of the Government's finances.

Few observers believe the Chancellor will not take the opportunity to make a popular announcement on extra funding for health and education, just as he did in July. That Budget was also billed as excluding public spending, allowing Mr Brown to pull a rabbit from his hat on the day.