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Analysis of the Pre-budget Report

Robert Chote and Christine Frayne
Press release
Weaker oil revenues and higher-than-expected inflation mean that the outlook for the public finances is once again less rosy than Gordon Brown had hoped.

The Chancellor yesterday added £1-2 billion each year to his Budget forecasts for public sector borrowing, despite modest tax increases and a more optimistic assessment of the potential for economic growth over the next few years.

Mr Brown announced tax increases worth £2 billion a year, half from air passenger duty and most of the rest from tackling tax avoidance. He also gave himself some extra revenue by assuming that, going forwards, the economy can grow by 2½ a year without pushing up inflation, rather than the 2¼ percent he assumed at Budget time.

The Chancellor said that he would meet his famous "golden rule" - to borrow only what he needs for investment over the ups and downs of the economic cycle - with £8 billion to spare, down from the £16 billion at Budget time.

But, for the second PBR running, Mr Brown changed the dates of the cycle over which he wants the golden rule to be judged - this time to a 10 year cycle ending this year. With just 3 months left to run it is now highly unlikely that the golden rule will be missed. There remains a strong case for an independent body to date the cycle.

The weakness of the underlying public finance forecasts suggests there will be no let up in Mr Brown's tough spending negotiations with Whitehall departments. In addition to sticking with his Budget assumption that public spending (excluding investment) will grow by just 1.9 percent a year on top of inflation over the three years of the forthcoming comprehensive spending review, the Chancellor pencilled in another year of spending growth at the same rate in 2011/12.

This suggests that Mr Brown is ready to fight the next election presiding over a steady fall in public spending as a share of national income. This did not stop him from attacking the Conservatives for proposing the same thing as a long-term goal.