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Brown to resist spending urge in UK budget

LONDON: Next Tuesday's budget is likely to mark the final break between Britain's "new Labour" government and its socialist "tax-and-spend" past which kept it in the political wilderness for almost two decades.

Chancellor of the Exchequer Gordon Brown has pockets bulging with cash and yet economists and Treasury watchers agree it is extremely unlikely the canny Scot will spend any of it in spite of pressure to deliver on manifesto pledges to improve public services.

Brown's budget, the fourth since Labour swept to power in May 1997, comes against a very healthy economic backdrop, with growth robust, inflation low and interest rates, although rising, still only at six percent.

But Brown, with an election probably little more than a year away, knows he is hemmed in by a key decision he made just after taking over the reins at the Treasury -- the independence of the Bank of England to set British interest rates.

FISCAL FREEDOM BLOCKED BY INFLATION DANGERS

With the Bank concerned about strong consumer spending and rising pay, the last thing Brown would want to do now is cut taxes and pump up a buoyant economy even further, causing the Bank to raise interest rates.

The Bank's Monetary Policy Committee, which left rates steady last week after several months of rises, was briefed about the overall fiscal position of the budget prior to its meeting, the Treasury said.

Economists believe the MPC was told the budget would be broadly neutral and its inaction on rates was a hint it was satisfied that the package would not be inflationary.

"Despite being flush with cash, Brown cannot afford to increase spending much for economic reasons," said Roger Bootle, economic adviser to accountants Deloitte & Touche.

"If he did, this would put pressure on the MPC to raise interest rates and that could threaten higher sterling."

Public finances are in much better shape than Brown has been predicting, partly because he has been deliberately cautious and partly because the economy has performed better than almost anyone was expecting, swelling tax receipts and keeping a lid on spending on welfare benefits.

Thus, for the current fiscal year to the end of this month, Brown is facing a surplus of up to 10 billion pounds, economists forecast, and will have to update his forecast from November of a 3.5 billion pound surplus, which itself was a revision of the forecast from the last budget of a 3.0 billion pound deficit.

This has led to accusations from the opposition Conservatives that he has put the public finances back in order -- he inherited a 28 billion pound deficit from them in 1997 -- only by raising taxes and thereby breaking an election pledge.

Conservative leader William Hague renewed the attack this week, pledging that under a Conservative government, taxes would be cut as a share of national income.

He may have misjudged the mood of voters, however, since an opinion poll showed eight out of 10 Britons would willingly pay more tax to fund better public services.

MORE 'SMOKE AND MIRRORS?'

Brown is thus likely in his budget speech in the House of Commons to make much of already promised increases in spending on health and education, which are kicking in now and set to continue in the coming years.

But Bootle thinks Brown is unlikely to want to pre-empt this summer's comprehensive spending review -- which will set spending totals for the three years from 2001/02 -- by announcing grandiose new spending plans on top of the increases already planned.

"This will be a 'smoke and mirrors' budget, where measures previously announced will be re-announced, and measures yet to be enacted will be pre-announced," he said.

"Moreover, much will be made of measures to increase entrepreneurship which cost very little." But Brown is sensitive to Hague's charge that the tax burden has risen under Labour and the Institute of Fiscal Studies estimates he would have to cut taxes by two to three billion pounds just to stabilise it because the healthy economy has pushed up tax receipts rapidly.

Thus he may make small changes to tax thresholds or bands to give away a little extra in this budget, especially as changes due to kick in from April anyway -- such as the abolition of mortgage tax relief and the married couples' tax allowance -- are set to make middle earners worse off.

But Prime Minister Tony Blair's spokesman Alastair Campbell did admit for the first time this week that the tax burden had risen since Labour took office, perhaps a hint that Brown may not after all feel under pressure to cut taxes, sensing the electorate would rather have more spent on public services. Brown will in any case concentrate on a raft of measures, most of which he has already announced, to boost enterprise and productivity across the economy and promote a fairer society.

"Brown is very keen on fiscal fine-tuning at the micro level, even if he has given it up at the macro-level," said Andrew Milligan, economist at Morley Fund Management.-Reuters