Borrowing increased but Brown justifies it on growth record since Labour came to power


Chancellor of the Exchequer Gordon Brown increased borrowing modestly in his eighth budget, but said he was right to do so by pointing to an unbroken record of economic growth since the Labour government first came to power in 1997.

In a broadly neutral budget, Brown gave net handouts of about 725 mln to taxpayers in 2004/5, mostly in handouts to pensioners. But even that moderate giveaway will turn into a fiscal tightening in 2005/6 as this year's budget measures will result in a net gain to the Treasury of 65 mln stg.

Brown said his policy of balancing the books over the economic cycle -- rather than year by year -- had helped the UK to continue to grow through two global economic downturns in the last seven years, 'without suffering the old British disease of stop-go.'

Brown pointed to GDP growth of 2.3 pct in 2003, and repeated his forecasts of last December that GDP will grow 3.0-3.5 pct in 2004 and 2005, though moderating to 2.5-3.0 pct in 2006.

He also forecast consumer spending will grow by 3.5 pct this year, easing to 3.25 pct in 2005 'as consumer spending moderates and growth becomes more balanced'.

He said growth had been safeguarded through continuing investment in infrastructure throughout a period of sluggish global economic growth, rather than seeking rigidly to balance the budget.

Brown's borrowing figures were higher than he had previously forecast, however, putting borrowing at 37.5 bln in 2004/5, compared with 37 bln forecast last December.

He now forecasts borrowing of 33 bln in 2005/6, 31 bln in 2006/7, 27 bln in 2007/8 and 2008/9 and 23 bln in 2009/10.

Brown said he expects inflation to end the year at a headline rate of 1.75 pct before rising to 2.0 pct by end 2005 - matching the Bank of England's statutory target. The predictions are in line with the bank's own forecasts.

Brown announced some cutbacks in areas of public spending, with 40,500 job cuts through spending cutbacks in the Dept of Work & Pensions and through the merger of the Inland Revenue and the Customs & Excise.

But he pledged real-term increases in defence spending in view of Britain's extended defence commitments abroad, and further increases in health, education and transport spending.

Brown also said the Treasury will look at the issue of UK membership of the euro at next year's budget.

In his speech, Brown has agreed to consult on the main points of a Treasury-sponsored report on housing published today by economist Kate Barker, which advocated building up to 140,000 new homes each year.

He said he will also introduce US-style real estate investment trusts to stimulate tax free investment in the construction sector and has agreed to address the issue of social housing in the next three-year spending round in July.

Credit Agricole Indosuez economist Adam Cole said the markets reaction to the budget has been muted.

'The near term implications for monetary policy are negligible,' he said.

Richard Collier-Keywood, head of tax at PricewaterhouseCoopers gave a warm reception to the budget.

'We welcome the steps taken today by the Government to continue to develop

a programme of rising public investment to keep the country on a consistent

path of economic growth,' he said.

The UK's defence industry welcomed news of higher defence spending.

'We are obviously pleased,' said Alan Sharman, director-general of the Defence Manufacturers Association.

'Clearly there has been pressure building on government over equipment expenditure and also there is the whole issue of homeland defence,' he said.

The Ministry of Defence last year spent 9 bln stg with UK defence contractors, out of a total budget of 29 bln stg.

The Trades Union Congress said the budget struck 'the right note', having neither cut public expenditure nor increased taxes, but it attacked the planned job cuts.

'Public services still need sustained investment, and we welcome the big

boost to education for all ages,' Trades Union Congress general secretary Brendan Barber said in a statement.

But he said the job cuts 'had more to do with shooting the opposition's fox' and combating the Conservative Party's claims of overmanning in the Civil Service.

The National Association of Pension Funds (NAPF) said Brown's radical simplification of the pensions system was 'long overdue', though it expressed disappointment that it will take a further two years to implement.

Brown announced plans to scrap the eight separate and confusing tax codes for just one, but the new rulebook will be introduced in 2006 rather than 2005 as first expected.

Brown also said he was implementing a cap over which pensioners' savings can be taxed. It has been set at 1.5 mln stg, rising to 1.8 mln in 2010.

'Our view is the cap isn't necessary but we are willing to live with it if we get this radical simplification of the regime,' said NAPF spokesman Andy Fleming.

He said the simplification would bring down red tape and pension costs and make it easier for people to save for old age.

The tobacco industry said Brown had missed an opportunity to curb tobacco smuggling by raising the duty on cigarettes by 8 pence a pack.

It said the higher duty will end up costing the treasury another 4.4 bln stg in lost revenues on top of the 19 bln stg lost since 1996 as the price gap has widened between cigarette prices in the UK and the rest of Europe.

The retail industry also bemoaned a missed opportunity to reduce government red-tape and deliver value for the taxes the retail community pays, through bolstering consumer demand.

'No one will be surprised that the chancellor has delivered such a bland budget,' said David Felwick, chairman of the British Retail Consortium.

'Whilst there is virtue in stability, there is no virtue in wasting an opportunity to improve the poor value for taxes retailers receive for contribution to the exchequer or to roll back the cost burden on business,' he added.

Britain's drinks industry criticised Brown's decision to raise excise duties on beer and wine, while distillers were angered by the proposed introduction of 'strip stamping' on spirits to help cut smuggling and VAT fraud.

The industry had been calling for a 'modest reduction' in alcohol excise duties, but Brown today put a penny on a pint of beer and 4 pence on a bottle of wine. He made similar duty increases on beer and wine last year.

'Once again, Britain's beer drinkers have had their pockets picked by the Chancellor,' said Mark Hastings, director of communications at industry trade body the British Beer & Pub Association (BB&PA).