'I'm no gambler' says Brown

City concern over optimistic forecasts - but some good news for children and pensioners

The Chancellor of the Exchequer Gordon Brown today fought off accusations that he was taking a "huge gamble" in his Budget, defending his decision to press ahead with ambitious spending plans for schools and hospitals without an overall increase in taxes.

He brushed off the label "Gambling Gordon", saying: "I don't think people think of me as a gambler." The markets, however, remained unimpressed, with the FTSE dropping 22 points by midmorning on Thursday.

In the Budget the Chancellor cut by half a percentage point his prediction only five months ago that the economy would grow by between 2.5 and 3 per cent this year. He surprised the City by saying the economy would grow by between 3 and 3.5 per cent next year, much higher than the 2.4 per cent average of independent forecasters.

Mr Brown added a further £8bn to his forecast for government borrowing over the next two years and only his optimistic picture for next year prevented a bigger rise in borrowing.

Although the Budget contained few surprises, the Chancellor raised the spirits of Labour MPs by announcing measures to help pensioners and set up a child trust fund for every baby born since last September to provide a "nest egg" when they reach the age of 18.

Under the scheme, every child will receive an endowment of £250, rising to £500 for children from the poorest families. Parents and grandparents and family friends can top up the fund to an annual limit of £1,000 a year.

A group of government-authorised companies will manage the funds when they begin in 2005. The children alone will have access to the cash when they come of age and there will be no restriction on how they spend it.

Old people will no longer have their basic state pension docked during hospital stays of up to one year, while the over-eighties will see their annual winter fuel payment rise from £200 to £300.

Mr Brown announced that the price of a packet of cigarettes will rise by 8p, a pint of beer by 1p and a bottle of wine by 4p. Duties on spirits will be frozen, and a scheduled 1.28p per litre increase in petrol will be deferred until October because of recent price rises.

There were no new direct tax rises on top of the 1p rise in national insurance contributions announced a year ago, which took effect this week. Income tax allowances for the current financial year have been frozen rather than increased for inflation.

The Tories claimed these moves amounted to a £26.4bn tax rise. "If these optimistic figures prove wrong, taxes will go even higher," said a spokesman. "It's a huge gamble."

In a remarkably upbeat hour-long statement, the Chancellor insisted he had not abandoned his "prudent" strategy and argued that Britain was in the best possible position to weather the global economic downturn.

He boasted that the 2 to 2.5 per cent growth he expects in Britain this year was double that in the 12-nation eurozone and about the same as in the US. He said Britain and North America would be the fastest growing of the G7 economies for the third year running.

Although Tony Blair had rejected a suggestion by Mr Brown that he announce his decision on the five tests for joining the euro in yesterday's Budget, the Chancellor left Labour MPs with the strong impression he would deliver a "not yet" verdict. Mr Brown promised an announcement by the first week of June and it is expected next month.

Mr Brown launched two reviews of Britain's volatile housing market to increase the supply of homes and make housing finance more certain. One aim is to bring in long-term fixed rate mortgages, which he said would be more important if Britain joined the euro.

The Chancellor confirmed he has set aside £3bn for the war in Iraq and announced an extra pledged £66m for humanitarian work in Iraq. A further £330m would be spent on tackling terrorism in Britain, he said.

Last night independent economists accused Mr Brown of being hopelessly optimistic on both economic growth and public borrowing, warning that he had only delayed the need for massive tax rises.

"Next year's forecast strains credulity," said Roger Bootle, the longstanding City economist and adviser to the accountants Deloitte & Touche. He said the Chancellor was "gambling on growth" by relying on a rebound in the world economy that would lead to a surge in export sales and business investment, and sustain consumer spending.

The Institute for Fiscal Studies, the National Institute for Economic and Social Research and the accountancy firm Pricewaterhouse Coopers believe the Chancellor will eventually have to raise takes by £10bn – equivalent to 3p on the basic rate of income tax.

The Government will borrow an extra £18bn over the coming five years – less than the £33bn that some economists forecast.

Deanne Julius, a former member of the Bank of England's monetary policy committee, said: "He is placing his hopes on a quick recovery this year and next but if that does not happen, we will see a ballooning deficit in the coming years and not a shrinking one."

Angus McCrone, senior economist at the Centre for Economics and Business Research, said the Chancellor would have to revise his numbers as soon as November's pre-Budget report. Michael Saunders, an economist at Citigroup bank, said: "The Chancellor is still in denial about the scale of the UK's fiscal deficits. At some stage taxes will have to rise significantly further, or the growth of public spending will have to be curtailed markedly. The Chancellor at this stage has chosen to cross his fingers and hope this problem vanishes."

* Growth forecast is reduced to 2-2.5 per cent

* Net borrowing for current year now £24bn ­ £4bn more than forecast

* Child trust fund of at least £250 for every baby born since September 2002

* Personal tax allowances frozen

* Extra £100 winter fuel allowance for over-80s

* New £20 a week 'worksearch' payment for lone parents

* £330m to be set aside for counter-terrorism

* £240m for humanitarian work in Iraq

* 8p on a packet on cigarettes; 1p on a pint of beer; bingo tax abolished

* Threshold for inheritance tax raised to £255,000

* Improved tax incentives to boost research and development