The Week in Politics: Testing Budget for Brown as growth forecasts shrink again

Domestic politics, which has been on the backburner since the war in Iraq began, will return to the fore on Wednesday when Gordon Brown presents his most testing Budget since becoming Chancellor.

Although ministers deny they expected a short war, my hunch is that Mr Brown expected it to be over by now when he decided to delay the budget from March. The Tories will accuse Mr Brown of using the war to provide cover for unpalatable announcements that he would have had to make anyway. For the second time in five months, the Chancellor will have to cut his growth forecasts and raise his forecast of government borrowing. Last November, Mr Brown predicted growth of between 2.5 per cent and 3 per cent this year, which is likely to be scaled down by half a percentage point. The £20bn borrowing he forecast is expected to soar to about £30bn.

Although the Iraq crisis undoubtedly added to economic uncertainty, Mr Brown is well aware that blaming everything on the war would not carry credibility in the City. I do not, therefore, expect him to announce a further dollop of money for the conflict on top of the £3bn he has already allocated.

Despite the bad headlines his revised forecasts may bring, the Chancellor will sound remarkably upbeat. He will blame the changes since November on weaker than expected global growth and the fall in the stock market. He will rightly take comfort – and not a little personal pleasure – from Britain performing stronger than France and Germany and the economy growing twice as fast as the eurozone.

Fittingly, given the political divisions over the war, Britain is performing more like the United States than Europe. Mr Brown believes this is no accident: the US Federal Reserve and the Bank of England have been more aggressive in cutting interest rates than the European Central Bank. The Brownites are also scathing at what they call Europe's "so-called stability and growth pact" which underpins the single currency.

With the Treasury's five tests on euro entry to be completed by June, the Budget will be closely studied for clues. Mr Brown may announce that the euro assessment has finally begun. Officially, the Treasury has been doing only "preparatory work" because it is nervous of the market reaction to the formal start of the process.

A Budget with a Eurosceptic tinge would fuel speculation that Mr Brown will deliver a "not yet" verdict in June. Tony Blair wants the tests to be revisited next year and is anxious for Mr Brown to give him more room for manoeuvre than he did in 1997, when he, in effect, ruled out a euro referendum for Labour's first term.

But the Chancellor wants to delay a referendum until after the next general election. His allies sense that he holds the cards: Mr Blair's rather cynical attacks on the French for scuppering another United Nations resolution on Iraq have made it hard for him to turn round after the war and say that Britain should join the euro.

Although Mr Brown's public support for the war has improved his previously strained relations with Mr Blair, tensions still bubble just beneath the surface. As usual, the Prime Minister has complained privately that Mr Brown has kept his Budget cards very close to his chest. After the Chancellor protested that he was not seeing "the paperwork" – intelligence material – on Iraq, one Blair aide remarked: "That's rich coming from him. It would be nice if he showed us some paperwork about the economy."

There is a lot riding on Wednesday for both men. Although the war might eclipse the Budget in the short term, the next election will almost certainly be decided by the state of the economy and the public services.

Mr Brown will not raise taxes next week. He hopes he has taken the sting out of the 1p increase in national insurance contributions that takes effect today, by announcing it in last year's Budget. But ministers are nervous that people will squeal when they notice the rise on their pay slips. Soaring council tax bills in many areas will compound the problem. Since their days as fresh-faced opposition frontbenchers, the Prime Minister and Chancellor have been anxious to dispel Labour's traditional label as a "high tax" party. After piling on the stealth taxes and now putting up national insurance, they are in danger of breaking their own rule.

According to the Tories, a typical family will be £568 a year worse off when the national insurance and council tax rises and a freeze in personal tax allowances are taken into account.

The public will want to see evidence that higher tax bills are making a real difference to public services. Yet problems in the NHS seem intractable. Parents may welcome some nicely painted new classrooms but they will not take kindly to teaching posts being cut – a real prospect in some areas.

Mr Brown will argue that the right course for the economy is to allow borrowing to rise when growth slows. If this approach does not work, Mr Brown may be forced to increase taxes again before the next election. Despite his outward confidence on Wednesday, the Chancellor will to some extent produce a "keeping your fingers crossed" Budget. Those well-chewed fingernails will be kept pretty short over the next 12 months.

a.grice@independent.co.uk