Brown ends squeeze on borrowing

THE CHANCELLOR will tomorrow abandon his tight squeeze on borrowing to pay for higher spending on educationand health and stave off the threat of recession.

Gordon Brown will signal the change in a pre-Budget statement to Parliament, as business and unions urge the Bank of England to cut interest rates.

More pressure for a cut will be brought today on the Bank's monetary policy committee by the National Institute, an independent economic forecaster, with a report saying Britain has a "one-in-three chance of outright recession".

The institute will also tell the Chancellor he will need to raise pounds 23bn more than expected to meet his spending plans and break his "Golden Rule" not to borrow to pay for current spending over the economic cycle. Mr Brown's pre-Budget statement, "Steering a Stable Course for Lasting Prosperity", will signal a rise in petrol duty by at least 23p a gallon in the Budget in spring as part of the "green" taxes.

But he will delay an energy tax on industrial users of electricity, proposed in a report by Lord Marshall, chairman of British Airways, to avoid adding to the burdens on business. The Chancellor will pay lip service to the manifesto commitment of a 10p in the pound lower rate of taxation but the lower growth forecast is likely to lead to its postponement.

The Chancellor's statement will last 30 minutes and its themes will be promoting stability, increasing productivity, encouraging and rewarding work and creating a fairer society while protecting the environment.

The pre-Budget report will contain a review of the economy and outline prospects for the next Budget. It will float ideas including tax breaks for companies investing in research and development.

Last night, Francis Maude, the shadow Chancellor, said it would be a "humiliating blow" if Mr Brown broke the Golden Rule. "We have consistently warned that lower than expected growth would blow a ... hole in the public finances. The Chancellor is locked in to his three-year spending plans. Either he must let borrowing rise and risk breaching his Golden Rule or hammer hard-working people and businesses with yet more tax rises."

Mr Brown will today use the Confederation of British Industry conference in Birmingham to deliver another push to Britain's entry to the European single currency after the first wave. He will announce the establishment next January - when leading nations in Europe launch the euro - of a cross-party committee to oversee legislation that will be needed to implement the introduction of the single currency in Britain.

The MPs, who are certain to include pro-European Tory MPs such as Kenneth Clarke, the former chancellor, will discuss controversial "change-over" plans, including practical steps to replace the pound with the euro. Mr Brown will be urging business to do more to prepare for dealing in euros.

Sources close to the Chancellor said Mr Brown would not be changing the carefully agreed government policy to join the euro when it was in Britain's interests to do so, but there is a clear intention to drive forward the preparations for joining after the first wave.

The Government is not ruling out allowing sceptics such as John Redwood, Tory spokesman on trade and industry, to join the cross-party group, although he accused the Government of trying to introduce the euro by stealth.

Tony Blair, writing in a German paper, signalled that Britain would be sympathetic to German demands for an EU rebate similar to Britain's as part of closer co-operation with the new German Chancellor, Gerhard Schroder.