FOCUS Brown burnishes image with vote-winners, sets sights on No 10

FOCUS Brown burnishes image with vote-winners, sets sights on No 10

	Published : Wed, 21 Mar 2007 17:16 By : Agencies Print this Story

LONDON (AFX) - Chancellor of the Exchequer Gordon Brown took a big step towards the office of prime minister, delivering a crowd pleasing swansong budget today.

Brown is widely tipped to succeed Tony Blair at the helm of the Labour party when the latter steps down later this year. And for many, Brown's tax cutting stunt today had more than a whiff of political ambition and cunning.

Brown delivered several headline grabbers, most notably a lowering in the basic rate of income tax by 2p -- a move even left of field observers failed to predict. Indeed, the budget showed populist tendencies with help for families, the environment and the aged. Even UK plc did not miss out on the largesse, finding itself the beneficiary of a 2p cut in corporation tax, the cut being the first in a decade.

'This is a grand political gesture,' said David Brown, chief European economist at Bear Stearns.

For Andrew Smith, chief economist at KPMG, the outgoing Chancellor got 'a lot of bang for his buck.'

But, fanfare aside, this is ultimately a revenue neutral budget - for example, the cut in the corporation tax rate is offset by the cut in capital allowances, he added.

Smith warned that public finances remain a constraint. The fiscal rules are now biting and the only way to balance the books over the next economic cycle is by reining back current and capital spending growth.

The budget showed that Brown is planning just that. He insisted that the government will be meet the golden rule which requires the government to balance its budget across the economic cycle, excluding investment. Additionally, he cut borrowing projections for the coming fiscal years even though North Sea oil tax revenues have dropped sharply over the past year.

'With a sharp slowdown in public spending growth now inked in from 2008, significant improvements in public services are dependent on productivity gains,' said Smith.

'Past experience of public sector efficiency drives has been mixed,' he added.

Ian Kernohan, economist at Royal London Asset Management pointed out that Brown's transition to premiership appears to have already begun and the changes likely to have heralded his ascent sped up.

'The one hundred days of shock and awe appear to have already begun,' Kernohan said.

'By cutting income tax and corporation tax, Gordon Brown is signalling to the electorate that he is not tax-and-spend old Labour,' he added.

He called the 2p income tax cut the most surprising tax change since Nigel Lawson's 1988 Budget which also delivered tax reductions.

Brown has brought out major announcements and has timed them to take effect in spring 2008. The timing suggests that Brown may be planning to call general elections just as voters are feeling good about the bounty they are about to get in April next year.

As public spending is set to slow rapidly over the coming years, it may well serve Brown to call elections next year.

'Public spending looks to be set against a difficult background in 2009,' added Kernohan.

Smith at KPMG echoed this view. 'With a sharp slowdown in public spending growth now inked in from 2008, significant improvements in public services are dependent on productivity gains.'

Brown at Bear Stearns said that the tax cuts will boost economic growth.

'This adds a double dollop of extra domestic demand into the already over-inflated UK growth picture,' he went on to add.

The tax cuts may well push UK GDP growth towards the higher end of Brown's GDP estimates for growth which he maintained at 2.5-3.0 pct for 2008 and 2009 and at 2.75-3.25 pct for 2007, he added.

Sturdy economic growth at a time when consumption is already buoyant may well end up strengthening the case for another Bank of England rate hike this year, taking the benchmark repo rate up to 5.50 pct from 5.25 pct at present, he said.

Andrew McLaughlin, chief economist at RBoS said, however, that Brown has stayed prudent.

'The headline tax cuts may look like he has rejected her, but in truth the Chancellor's love affair with Prudence carries on!,' he said.

The Budget was broadly neutral for the economy, he argued.

'Corporation tax is down but the overall tax take from businesses is up. And abolishing the starting rate of income tax takes back almost as much as the decision to cut the basic rate gives away,' said McLaughlin.

'Put it all together with the decisions in the pre-budget report and the Treasury will take an extra 2 bln stg out of the economy this year.'

By Sivakumar Sithraputhran;sivakumar.sithraputhran@thomson.com

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