Brown breaks with tradition

The first budget of a parliament is normally when chancellors get bad news out of the way. If taxes are going up, governments prefer not to hang about, taking the view that voters will have forgotten by the time the next election rolls around.

Gordon Brown broke with this tradition yesterday. Those in the City who thought that the chancellor would take a squint at a budget deficit totalling more than £100bn in the three years to 2007/08 and take out an insurance policy were wrong. He cut taxes by £400m next year and will raise them by a similar amount the following year. Given the size of Britain's £1.3 trillion economy, this is chickenfeed.

Brown assessed that this was the wrong time to take money out of the economy. The weakness of retail sales and purchases of new cars is evidence that individuals have seen their spending power constrained by minuscule pay rises, rising council tax bills and sharp increases in energy prices. Businesses, too, have been feeling the pinch from rising energy costs and are under pressure to fill pension black holes.

The second reason why taxes were left unchanged is that Brown doesn't think rises are needed. He is adamant that last year's dip in growth was the consequence of a cooling housing market and higher oil prices, but that the recovery is now under way. The optimistic scenario is that rising asset prices - the stock market and property - ginger up a feelgood factor among consumers. Rising demand prompts businesses - which currently enjoy strong balance sheets - to invest. Meanwhile, the buoyancy of the global economy provides a helping hand to exports. In 2007 and 2008, if Brown is right, the economy will grow by about 3% a year.

An equally plausible scenario is that what we saw in the second half of last year was a sucker's rally. The quarter-point cut in interest rates from the Bank of England raised hopes that it would be the first of a series of reductions, and that wooed people back into shops and estate agents. But the Bank has now kept interest rates unchanged for seven months, and even those City economists who think borrowing costs are heading downwards say it won't happen until the second half of the year.

Meanwhile, oil prices are not coming down and utility bills have been going through the roof. The only way consumers will be able to sustain the sort of spending growth envisaged by the chancellor is if they are prepared to borrow more. Yet the latest figures show that consumers are unhappy about their exposure to debt.

In the circumstances, growth may struggle to meet Brown's forecasts. The consensus in the City is that he might just make it this year, but that the figures for 2007 and 2008 are way too optimistic. If the Treasury is wrong about growth, it will also be wrong about the public finances. Roger Bootle, economic adviser to Deloitte, thinks the deficit could be £10bn higher than the chancellor is expecting by 2008/09 - just as the next election looms.

Ah yes, the next election. Almost forgot. The final reason why there there were no nasties in the budget was that economics played second fiddle to politics. The idea was to skewer David Cameron. Politically, that would have been tricky had taxes gone up.