Green Budget: Public finances - Brown learns from past mistakes and err s on the side of caution

The Chancellor of the Exchequer sees the healthy state of the nation's finances as a mixed blessing. It is better for the Government to have to borrow less rather than more, and this is the bonus the booming economy has delivered since 1 May.

On the other hand, Gordon Brown is determined to resist pressures to take advantage of this good fortune in order to loosen controls on public spending. And the pressures are many - health, education, public sector pay, and lone parent benefits to name but a few.

A lower-than-expected payment to the EU provided pounds 400m extra for pensioners this winter and next. But there were no other changes in spending and clear signals that the Government will remain ultra-tough on pay.

So the Chancellor was able to announce, as widely expected, a reduction in the forecast level of the Public Sector Borrowing Requirement this year to pounds 9.5bn from the pounds 10.9bn in the July Budget (or, excluding windfall tax revenues, to pounds 12bn from pounds 13.3bn). The target for next financial year was edged up to pounds 4.5bn from pounds 4bn. Both year's figures are well within the ceilings set by the Maastricht Treaty.

The report published after the Chancellor's statement yesterday said temporary factors explained the better figures for government borrowing than had been expected in July. Strong growth has delivered booming tax receipts in the current year.

More important, spending is currently lower than last year. Most of the reduction in this year's PSBR target has been made possible by the lower level of unemployment, which has lopped pounds 1bn a year off social security expenditure. The Treasury is also confident of staying within the "Control Total" set by the last government and reaffirmed by this one.

In a pre-emptive strike against demands that the Chancellor should loosen the fiscal straitjacket, the Treasury published a paper earlier this week pointing out the perils of relaxing control over the public finances at this stage of the business cycle, when the figures look their most favourable. The conclusion was that it was better to err on the side of caution because it is so painful to have to retrench later when the economy turns down and the outlook for the PSBR takes a turn for the worse.

This was the lesson of the late 1980s and early 1990s. As the economy boomed, Nigel Lawson cut taxes, and spending subsequently rose sharply in the run-up to the 1992 general election. After the election, as the recession deepened, taxes had to be raised to bring ballooning public sector borrowing under control.

Mr Brown spelt it out yesterday. "We will not make the mistakes of 1988 and return to boom and bust," he said.

Yet he also promised to increase spending on priority areas. The Comprehensive Spending Review, which will set spending priorities, is not due until to be finished until next summer. But meanwhile Mr Brown has carved out some scope for extra spending. The new Domesday Book register of public assets will provide one method of raising expenditure without busting the limits.

Departments are to be allowed to sell assets of a value of up to 3 per cent of their budget, adding up to a potential pounds 8bn a year for the next three years. Although the proceeds must be spent on capital investment, not current outgoings, they allow higher spending within the existing cash limit, at least for those departments which have the initiative and the easily saleable assets.

Yet there was no doubt, even in the most sceptical City of London dealing rooms, that this is one Labour Chancellor who does not intend to find himself at the mercy of the financial markets after spending too much. Marian Bell, an expert at Royal Bank of Scotland, said: "The fiscal cautions are deliberately cautious." Like other analysts, she welcomed Mr Brown's decision to err consistently on the side of caution.

David Bloom, at James Capel, said: "Budgets are much easier when the cycle is going your way, but this is still all eminently sensible stuff."

Roger Bootle, chief economist at HSBC Markets, said: "The Chancellor is genuinely determined not to repeat earlier mistakes."

Yesterday's documents refreshed the pledge to stick to the "golden rule" whereby borrowing will not exceed the government's investment spending over a business cycle.

Mr Brown also intends to make an annual assessment of the state of the nation's books a legal requirement.

This "code for fiscal stability" was outlined in a document published yesterday. It said the proposed code would "make clear the framework in which fiscal policy will operate. It will demonstrate the Government's commitment to this framework, putting its reputation firmly and squarely on the line."

This too was a winner in the financial markets. Ciarn Barr at Deutsche Morgan Grenfell said: "The market will take comfort from the obligation it places on the Government not to fiddle the numbers."

Even so, some City economists would prefer a still tougher stance, at least in the short term. They argue that it would allow the Bank of England to be more relaxed about interest rates.

But it was hard for the vigilantes to find anything to object to in Mr Brown's statement. Even on the assumption that Government expenditure grows by 2.25 per cent from 1998/99, if that is the outcome of the spending review, the Treasury forecasts a budget surplus by 2000/01. If spending grows by only 0.75 per cent a year, there will be a small surplus by 1999 and a large one by 2002.

The moral of this range of scenarios is clear: clamping down on the deficit between expenditure and revenue now will create the scope for increases in spending in the run-up to the next general election.