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Roger Bootle's preview of the Budget 2007

• Gordon Brown will seek to use his 11th and final Budget to underline his legacy as Chancellor. He will doubtless trumpet the good performance of the economy during his tenure. He will be able to say that this good performance has continued to the present. Over the last year, the economy has outpaced even his upbeat expectations. Over 2006 the economy grew by 2.7%, compared to his forecast of 2-2.5%. He is also likely to be able to announce in the Budget that his own fiscal rules have been met over the economic cycle.
   
• Despite this apparently good news, considering the strength of the economy, the public finances remain in relatively poor health. Even Mr Brown’s forecasts envisage only a modest improvement over the coming years, based on a pretty optimistic outlook for the economy.
   
• Indeed, if unfunded public sector pension liabilities and PFI obligations were added in, the ratio of public debt to GDP would stand at something like 90% of GDP rather than the 37% which Mr Brown will quote. Accordingly, the credibility of the Sustainable Investment Rule has been undermined.
   
• Moreover, his own Golden Rule would probably have been broken were it not for some changes to the timing of the economic cycle over which it applies.
   
• What’s more, the Chancellor’s borrowing forecasts incorporate a very sharp slowdown in the growth of public spending. Such constraint may be hard to achieve after the spending splurge of the last five years and may not be compatible with Mr Brown’s ongoing ambitions to improve public services and reduce poverty.
   
• Given this, to put fiscal policy on a fully prudent footing, taxes would probably have to rise by about £10 billion - although I do not think he will do much if at all towards raising this sum in this Budget.
   
• Given the underlying fiscal weakness, and the squeeze on government spending already underway, when it comes to major policy initiatives, this Budget will be rather dull. It looks as though Mr Brown will bow out with a whimper rather than a bang.
   
• He will no doubt look to strengthen his credentials as Prime Minster-in-waiting by making minor policy alterations and recommendations across a whole range of areas. Further environmental policies seem likely to top the bill. There could be increases in fuel duty or Vehicle Excise Duty. Other possible measures include a further rise in Air Passenger Duty - although this is probably unlikely so soon after the last one - and changes to the Climate Change Levy and Landfill Tax. He may also announce further anti-avoidance measures.
   
• Even without further tax increases, it is clear that the enormous fiscal boost to the economy seen over the last five years is now giving way to a period in which the public sector is likely act as a significant drag on both economic activity and inflation.
   

Read Roger Bootle's full UK Budget 2007 Preview (PDF)

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