Hamish McRae: Gordon Brown's figures might just about add up, but only in the best of all possible worlds

I think that was a Budget which is going to appear very different in three or four years' time to how it does now.

I think that was a Budget which is going to appear very different in three or four years' time to how it does now.

Nothing should detract from the Chancellor's achievement of maintaining growth through the downward leg of the economic cycle, nor from his decision in the first term of office to pay off as much debt as possible. If you get decent growth, all other aspects of public finance become more manageable, and if you have low levels of debt, you can borrow to maintain growth.

All that is laudable. The problem is that when you dig into the Budget numbers, things don't hang together. There are four substantial concerns and one bright spot - four funerals and a wedding, if you will.

The wedding is growth. Most other forecasters (including the Bank of England) have some doubts about the Treasury's expected range, particularly next year (first graph). But anything over 3 per cent this year is much better than any other large country in the eurozone, and given the Treasury's good record on forecasting, maybe growth will turn out a bit higher yet.

Funeral one is tax revenue. As Bill Robinson notes over the page, revenues are coming in below forecasts despite the good growth. Project that forward and the Treasury thinks revenues will grow by the equivalent of more than two percentage points of GDP (second graph). Indeed, for its sums to add up, revenues have to rise to the highest level as a proportion of GDP since the early 1980s. It is very hard to see that being possible at present tax rates. As the Item Club comments, either taxes will have to rise or the Chancellor will have to rewrite his fiscal strategy.

Funeral two is the pressure on the public sector. The Chancellor made great play of the fact that he is increasing spending while the Opposition would cut it. Actually, apart from the protected area of the NHS, the public sector may face the sharpest squeeze since the mid 1980s. Total spending will grow at 2.5 per cent a year, but if health gets more, that means other departments will get less. Wages will rise by more than 2.5 per cent, so the only way for output to rise will be the continuing grind of cranking out more and more productivity.

The private sector has to do that, of course, and you could say it is about time this happened. But the private sector does have two advantages: the share of labour in its costs is higher than in the public sector; and it can outsource abroad more easily. So, yes, it must be right to put pressure on the public sector in this way and, yes, it must be right to cut head-office staff rather than front-line people. But it is going to be very painful.

Funeral three is personal sector indebtedness. There was not a lot about that in the Budget but, as is widely appreciated, our consumer boom has only been kept going on borrowed money. The Treasury reckons that people will be weaned off their borrowing spree only gradually: consumption will grow just a bit slower than the growth of output as they rebuild their savings. That may be right, but even if it is, the next few years will feel less buoyant than the past few. My guess is that consumption will grow at about 2 per cent per year against 4 per cent for much of the past decade. If I am right, we won't like that.

And finally, all the Budget assumptions are based on everything in the world economy going pretty well. There will be decent steady global growth. Exports will rise more or less in line with good growth in world trade. Inflation will not be a problem. There won't be a crash in China. Commodity prices will remain under control. The eurozone will pick up speed. Sterling will be all right. The dollar will be all right. The huge global imbalances between the US and the rest of the world will be managed successfully.

In short, the fundamental assump- tion is that we are indeed in the first part of the upswing in a fairly conventional global economic cycle.

Now that may be right. It is silly to "borrow trouble", as the novelist Robert Louis Stevenson put it. We should not manufacture unnecessary fears. But what worries me is the assumption that everything will turn out towards the more favourable end of the possible scale. We are clearly in the upswing of the cycle but the imbalances are unusually large for this phase. The recovery has been puffed by cheap money and by enormous budgetary deficits. There is a grand global transition from inflation to price stability taking place, and that may slither into deflation. As an open economy dependent on world trade, the UK is as vulnerable as any other.

My guess is that there will be a continued reasonable recovery but it will be tough to increase living standards in the face of demo-graphic pressures. Germany, Italy, France and Japan have all found themselves running on the spot at various stages of the past decade. And Mr Brown's Budget simply does not acknowledge that we will find it harder in the life of the next Parliament than in the last and the present one. But then he won't be Chancellor in the next Parliament, will he?

And there's the rub. It has been extraordinary for anyone to stay in this particular office for so long, not just here where Mr Brown passes David Lloyd George, but elsewhere in other developed countries. There is a great advantage in that longevity does give stability, at least as long as it is coupled with competence.

But Mr Brown has been helped not only by the economic legacy he inherited on entering office, and by his early decisions, but by a more general mix of factors that apply to the UK economy.

The wrenching structural changes that took place during the previous two decades (started, actually, by the former Labour Chancellor Denis Healey), coupled with the good fortune to be historically strong in growth industries such as finance and communications, meant that if only a Chancellor could deliver stability, most other things would come right. He did and they have. But there really are tougher times ahead.

Oil, ore and an Oriental twist in a US tale

Filled up the car lately? It's not a comforting experience and this time the culprit is higher oil prices rather than an aggressive Chancellor. The oil price, at $33, is towards the top end of its range and while that is to some extent a reflection of the weakness of the dollar, it is starting to nudge through into other costs in the US.

We are protected a bit, but only a bit, by the strongish pound. Indeed had sterling stuck at around $1.50, petrol would be pushing 90p a litre.

But it is not just the oil price that is causing concern. Metal and ore prices are at long-term "highs"; shipping rates have gone though the roof; some other commodities are pushing up in price. Why?

The simple answer is demand from China. Something like one-third of the additional demand in the entire world economy comes from China. In terms of incremental demand, it is as big as the US.

However, that demand is skewed towards the heavy end of the industrial spectrum, with the construction boom putting a strain on the world's raw material suppliers.

Not many people realise that China, for all its size, is relatively poorly endowed in the major commodities, with the exception of coal. Thus it has become the largest producer of steel in the world, which means ore imports. It produces more than half the world's cement. And the motoring boom means it has passed Japan as an oil importer. (Fact: last year, for the first time, China built more cars than the UK.)

What happens next depends less on China, which will carry on growing in the short term, than the US. The key question is whether the commodity price boom feeds through into higher US inflation. Several independent forecasters have warned that it might. This concern is starting to surface in the press and on the radio, but so far the Federal Reserve has played down these worries.

Why? Well, it is difficult in an election year for the Federal Reserve to increase interest rates - there is one window in the summer - particularly since the recovery has been a relatively jobless one.

Inflation is the dog that, so far during this cycle, hasn't barked. The oil price is a distant growl.