GORDON Brown was yesterday warned that if Labour wins the expected May 2005 general election, taxes and borrowing might have to rise and spending might have to fall. The forecast came two days ahead of his pre-budget report.
In its bi-annual report, the Organisation for Economic Co-operation and Development (OECD) said the UK's budget deficit was likely to be above 3% of GDP for 2004 and ''in the absence of a spontaneous rise in taxes, additional action may be required to achieve a decisive and sustainable reduction''.
The Paris-based economics think-tank suggested even a tax windfall from the higher price of oil, estimated at (pounds) 3bn for the Treasury, was unlikely to help the chancellor lift Britain's economy out of a black hole, given the government's planned public spending increases of about 12% through 2006. ''So the deficit is likely to increase slightly,'' said the OECD.
It trimmed its forecast for economic growth in 2005 to 2.7% from the 2.8% it predicted six months ago, but raised its forecast for the current year to 3.2% from 3.1%. A raft of economists have suggested that
Mr Brown's predicted growth for next year of 3% to 3.5% will have to be downgraded to 2.5%. However, last night the Treasury was optimistic, declaring: ''All our plans are fully affordable.''
When Mr Brown stands at the dispatch box tomorrow, he will brush aside the doom-mongers, whom he has proved wrong before, and point out the economy is now in its 50th successive quarter of growth.
He will lay the ground not only for the forthcoming electoral fray with the Tories, who are intent on making tax a central issue, but also what many will interpret as his protracted bid to succeed Tony Blair.
Only this week, Mr Brown told Newsweek magazine that the next 10 years could be ''Britain's decade'', with the UK moving to the forefront of global economic success by emulating the spirit of enterprise of the US. Yesterday, he repeated the remark, saying it would be the theme of tomorrow's pre-budget report (PBR).
At the Political Studies Association awards lunch in London, where he was named politician of the year, he said: ''The heart of the pre-budget report is a patriotic vision of Britain's future as a country of ambition and aspiration. How we make Britain the best place to grow up in, the best place to study, the best place to start a business and to work as we build a Britain that makes us even more proud to be British.''
He even suggested ''a new Institute and Forum for Britishness Studies examining the forces at work in shaping the future of Britain'' should be established.
His economic statement is expected to focus on boosting enterprise and science so Britain can compete better against countries like India and China. There is also speculation the chancellor could include scrapping the 1.92p litre rise in fuel tax announced in the most recent budget and already put off once. This could cost the Treasury about (pounds) 750m.
Economists vary as to whether Mr Brown will just make or just break his ''golden rule'' - only borrow to invest - for the current economic cycle that runs to 2005-6, but most are agreed that for the next cycle the economy will be facing a hefty deficit. The CBI has warned the next cycle could start with a (pounds) 34bn black hole. Ian McCafferty, its chief economic adviser, said: ''The government will have to pull in its horns and business cannot be expected to dig it out of a hole when profits and investment are under so much pressure.''
Earlier this week, 102 businessmen, economists, and academics called for a cut in taxes to boost enterprise.
chancellor's choices
TO avoid the economy plunging into a large financial black hole, Mr Brown has a mix of options:
Borrow more
The Treasury estimates by 2006 borrowing will fall to (pounds) 31bn from the (pounds) 37bn for 2004-5. However, if income from tax does not pick up and spending continues apace, some analysts predict it will have to shoot up to around (pounds) 40bn in 2005-6. While many economists believe the chancellor will miss his ''golden rule'' - only borrow to invest and balance the books over the economic cycle - Mr Brown has once again dismissed such talk. Government debt has been rising for a couple of years now but, at a little over 33% of national income, remains well below the European average.
Tax more
Tax receipts, particularly from businesses, have not been as good as thought. Earlier this year, the Treasury estimated income from tax would increase by 7.8% this year. But so far it has risen by only 6.3%. It could be tax receipts in the final quarter will rise to fill the gap, but many economists believe they will not. Some believe taxes may have to rise by at least (pounds) 7bn to cut the budget deficit.
Spend less
The government is committed to increase spending, pushing through a (pounds) 100bn programme on health, schools, and transport. Mr Brown pledged an extra (pounds) 61bn a year from 2008 on key services. Some of the planned extra spending is predicated on efficiency savings, including cutting more than 100,000 civil service jobs. However, there is some scepticism over whether such cost-cutting can be achieved. But with an election pending, it is highly unlikely Mr Brown will turn round and say he is scrapping his commitment to Britain's public services.
Get lucky
Mr Brown has defied the doom-mongers before. If he manages to avoid spending the (pounds) 3bn contingency fund, it will be a close-run thing. If any of this year's overshoot in borrowing runs into next year, his ''golden rule'' will be broken. However, it seems certain Mr Brown will not break the political golden rule - months from a general election, do nothing to jeopardise victory.
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