Chancellor denies Budget was too soft on consumers

Gordon Brown, the Chancellor of the Exchequer, yesterday defended the Budget against criticism from MPs that it had not done enough to cool down the overheating economy.

He insisted it was a tough Budget that would reduce the pressure for higher interest rates over the medium term as government borrowing declined.

Mr Brown also told the Treasury Select Committee it would have to play a bigger role in questioning the Bank of England about interest rate decisions. He urged the committee to quiz the Governor and members of the Bank's Monetary Policy Committee after each quarterly Inflation Report.

Mr Brown emphasised the importance of setting policy for long-term economic stability: "I do think there has been too much short-termism in British economic policy."

His decision to give the Bank its operational independence had given an important boost to long-term credibility. "I don't believe that ever again a government can be accused of taking short-term, politically motivated decisions about interest rates."

He confirmed there would be a "green Budget" document published for consultation during the autumn, ahead of next March's Budget.

However, some MPs queried Mr Brown's decision not to raise taxes on consumers in his first Budget. Many commentators have blamed the need for a subsequent rise in interest rates, and the strong pound, on this decision.

The Chancellor replied: "We inherited a situation where inflation pressures were such that action on interest rates had to be taken and a situation where the deficit had to be reduced."

Mr Brown claimed support from the International Monetary Fund. In a glowing report on the Government's policy published yesterday, the world's economic watchdog said the Budget had been tougher than many people acknowledged.

Mr Brown repeated the Government's firm commitment not to extend VAT to items like food, children's clothing and newspapers and magazines and denied that there would be any EU pressure to do so. One of the few negative notes in the IMF report was the suggestion that the Government ought to consider precisely this widening of taxes on consumer spending.

The only real tension in yesterday's session came when Conservative MP for Grantham and Stamford, Quentin Davies, vigorously challenged Mr Brown's claim that the tax measures in the Budget would have a significant impact on consumer spending.

Several of the new Labour members of the committee were clearly torn between their loyalty and their unease about the present mix of interest rate and fiscal policy.

Questioned by Ruth Kelly, Labour MP for Bolton West, about whether the Budget had been intended to correct the imbalance between rapid consumer spending and weaker exports and investment, the Chancellor said it had.