Budget 2006 - The Economy

Ahead of Chancellor Gordon Brown's 10th Budget speech, number crunchers at the Ernst & Young ITEM (Independent Treasury Economic Model) Club forecast the overall tax burden to reach a record high this year and to rise again the following year. Not perhaps figures the Chancellor of the Exchequer would want to have making headlines.

Nevertheless, as economic pundits consider the potential prospect of life at the Treasury after Brown and the political commentators try to decide when he'll get the keys to 10 Downing Street, one of the Chancellor's legacies is the highest tax take ever - more than a million a minute!

However, it's still not enough, after a surprisingly strong revenue figure in January came an equally surprisingly public sector net borrowing figure for February, in fact the worst recorded for the month of February since Labour (we appear to have lost the 'New' by now) came to power in 1997.

Hard decisions have been left untaken. The postponement of the 2006 spending review until 2007, which was announced last year took the pressure off.

Of course, Gordon Brown displayed none of the uncertainty that the background numbers might engender in his performance to the House of Commons. "Prudence" didn't get an outing but we were promised once again there would be "no return to boom and bust".

Certainly, inflation is under control and long term interest rates are at 40-year lows and with a public sector pay round set to average just 2.25%, an example being set for the rest of us perhaps, Gordon Brown does have some things to boast about.

For the Chancellor, the British economy is "strong and strengthening" and on the way to recording its tenth consecutive year of uninterrupted economy growth since 1997 and, indeed, the tenth year in which growth outpaces that of the rest of Europe.

The economy will, he said, grow by 2% to 2.5% in 2006/7 and so meet his fiscal rules. Growth in 2007-08 is expected to be between 2.75% and 3.5%, while domestic demand was expected to grow this year by 2%-2.5% and 3%-3.25% in 2007-08.

Net borrowing should fall from 2.4% of national income to 1.9% and in successive years, 1.6%, 1.6%, 1.6% and 1.5%. Mr Brown said there would be a £16bn surplus on the current economic cycle up to 2011, which met his "golden rule".

One would expect the Chancellor to put a favourable spin on his machine -gun delivery of statistics. He made much of the fact that economic growth over his 10 budgets had averaged 2.8% a year. He prefers not to dwell on last year, when at 1.8%, the pace of growth in the economy was its slowest since 1992. The figure just overshoots his official 1.75% forecast. However, that prediction, made last December, was itself slashed from an original 3-3.5% forecast made in Budget 2005.

What are the chances of meeting his self imposed fiscal rules? Last year, for the fifth year running, the Treasury had to downgrade its public finance forecasts between the Budget and the pre Budget Report. Based on its past forecasting record, the Institute for Fiscal Studies says the Chancellor has a more than 40% chance of breaking his golden rule and a 37% chance of breaking his sustainable investment rule in this economic cycle.

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