Wednesday, April 09, 2003

In today's Budget, Chancellor of the Exchequer Gordon Brown has revised his forecasts for this year's growth downwards to 2-2.5%. This forecast remains optimistic in relation to the forecasts of most independent observers. At the same time, he has raised his expected level of borrowing this year from £20billion to £27billion - a substantial increase.

The government is perfectly right to borrow when the economy is in the doldrums - when rapid growth does not exist to deliver tax revenue windfalls and when unemployment is rising (it isn't yet) to increase government outgoings on benefit payments. The story we are hearing from Mr Brown is a mixed one, though - he remains optimistic about growth, yet for some reason still finds the need to borrow more.

At the risk of sounding pessimistic, my view is that Mr Brown's forecast for growth is high. This would be so even if he were not increasing his borrowing. But the increased borrowing stores up some problems for the future. At some stage what he borrows must be paid back. If that can be done out of tax revenues delivered as a windfall from economic growth, then all well and good. But if he finds that he will need to raise taxes in future budgets in order to get his books to balance over the business cycle (his stated aim) then those increased taxes will stunt future growth still further.