The fat and the lean

The pre-Budget report presages an era of financial uncertainty, borrowing and squeeze.

By Gordon Brown's standards, Alistair Darling's first autumn statement and Comprehensive Spending Review were masterpieces of simplicity. Gone was the rat-a-tat of complex and detailed announcements that have been a feature of Brownite delivery over the past decade. In their place came a more concise, slightly hesitant and marginally less triumphalist approach.

The stripped-down statement was matched by the Budget documents. Brown's were an exercise in paper creation, running to many hundreds of pages. By contrast, Darling managed to deliver both a pre-Budget report - with some sweeping tax changes - as well as the nation's spending commitments for the next three years in a mere 280 pages. But I suppose that if many of your proposals are simply refits of those drawn up by the Conservatives you can afford to consume fewer trees.

The legacy that the Prime Minister has left his Chancellor could hardly be described as golden. Many of the tax changes were a hurried reaction to the proposals unveiled by the Tories at their conference and a reaction to George Osborne's tax simplification agenda. The core reform is in capital gains tax, setting a single rate for everyone of 18 per cent. This has the benefit of recapturing some of the profits made by the private equity princelings and binning one of the most complex sections of the tax code. Even accountants will be relieved that this burden has been lifted.

It was just as well for Darling that the 9 October speech was not to be the pre-election Budget statement he planned for when he brought the date forward. The Chancellor had little stardust to sprinkle around. Aside from the dramatic improvement in inheritance tax thresholds, there were no giveaways.

Indeed, for much of the public sector, what the Treasury had to say will make for grim reading. In recent years there has been loud moaning in Whitehall about Treasury interference in departmental spending with its insistence on setting tests and targets, but at least then there was plenty of money to spend. The Treasury has now returned to type as the mean-spirited guardian of the public finances.

Brown had signalled in his last Budget that the glory days of government spending were coming to an end. Not only will public spending totals be squeezed for the next three years, the projections suggest the clampdown will extend far beyond that. Over the next five years, spending as a share of national income will actually shrink by £7bn in current money.

Despite Darling's bright talk of 20 new hospitals and new GP drop-in centres up and down the country, even the National Health Service - recipient of so much largesse under Labour - will suffer pain. The proposed 3.7 per cent annual increase in health spending over the next three years is almost half the average 7.2 per cent since Brown sought to lift the NHS out of poverty in 1999. This falls short of the 4.4 per cent that the government's health guru, the former NatWest (now Northern Rock) banker Sir Derek Wanless, said was necessary if the UK was to make progress towards a world-class service.

Even so, health comes out better than any other area - with the exception of international aid, a subject on which Brown is a real believer. The PM has installed a four-person ministerial team at the Department for International Development to help distribute the proposed budget of £9.1bn by 2010-2011. By then the UK will be spending 0.6 per cent of its total wealth on foreign assistance, becoming the first of the Group of Seven richest countries to approach the UN target figure of 0.7 per cent of national wealth.

So why is the public spending settlement so mean? In essence, the public finances are in a mess. Fantasy forecasting by Brown in his last Budget projected far larger tax revenues than have been collected. As a result, a deficit of £34bn for 2007-2008 has swollen by £4bn. Indeed, it is projected that over the forecasting period of five years the government will need to borrow £19bn more than originally estimated.

The most alarming aspect of this for Labour is that the tax shortfalls are occurring with a modest downward shift in the growth forecast for the next year, from 2.75 to 2.25 per cent. Many economists believe that the credit crunch this summer, followed by the run on Northern Rock, represents a seismic shift in Britain's prospects. If that proves to be the case, the black hole in the Budget will become deeper and the government will have little choice but to take an even bigger axe to spending - or raise taxes.

Brown would be better placed if he had listened to the IMF's advice during Britain's fat years of growth. It called on him then to use the opportunity of high growth to rein back spending and bring the Budget closer to balance. If Brown had followed this advice, his government would not have found itself in the current bind. It would have been able to follow the Keynesian recipe of raising government spending during a slowdown, so as to stabilise employment.

Brown thought he knew better. Now he and Darling can only pray that the fallout from America's trailer mortgage meltdown and the Northern Rock fiasco does not cause Britain's recent growth record to implode.

Alex Brummer is City editor of the Daily Mail