Public finances. Gordon’s sums look better

But there is still reason to worry about future years

GORDON BROWN has a nasty habit (for his political opponents) of having the last laugh. The economy grew by 3.1% in 2004 - within his forecast of 3-3.5% in his last budget, thus confounding sceptics. He may trump this by getting his public-finance sums more right than most observers expected. That would be an even sweeter vindication for Mr Brown when he presents his budget on March 16th.

The chancellor focuses on the gap between current spending and revenues. This is because he wants to meet the “golden rule” of borrowing only to invest over the economic cycle. The Treasury says that the present cycle started in 1999-2000 and will end in 2005-06.

In the first years of the cycle, there were big surpluses. More recently, there have been deficits, reaching £20.7 billion in 2003-04. In his budget last March, Mr Brown was unfazed. He forecast that the deficit would shrink to £11 billion this year and £5 billion in 2005-06. According to the Treasury, this meant that the golden rule would be narrowly met.

The chancellor's confidence appeared misplaced during the first nine months of the financial year. By December, the cumulative deficit was still bigger than it had been in December 2003. But January's figures brought an improvement.

The main reason is that tax revenues were 12.7% up on January 2004. In the ten months to January, they were 7.8% higher than in the same period in 2003-04 - bang in line with the budget forecast for the whole financial year. The improvement in the deficit would have been even bigger if current spending had grown in line with the budget forecast of 5.1%. Instead, it was 6.3% higher in the ten months to January than in the same period in 2003-04.

It is unclear whether the Treasury will be able to yank spending back under control in the final two months of the year. However, a technical change announced on February 18th by the Office for National Statistics will help Mr Brown meet the golden rule. In March, some road maintenance expenditure will be reclassified as investment rather than current spending. This change, which will affect past estimates as well, prompted Oliver Letwin, the Conservative shadow chancellor, to protest about “fiddling the figures”.

Things could still go wrong for Mr Brown. The bumper tax take in January could be followed by poorer receipts in February and March. But whether by fair means or foul, the chancellor now appears considerably closer to meeting his budget forecast than seemed likely late last year.

That may help Labour in the general election expected in May, but a tax-raising budget in 2006 still looks inevitable. The Treasury thinks that much of this year's deficit is because the economy is operating below capacity. But in its latest Inflation Report, the Bank of England said that output was “close to, and possibly slightly above, potential supply”. If this is the case, the deficit is structural and painful tax rises will be necessary to correct it.

• Primary Source