Pre-Budget Report: Brown warned to avoid pre-election giveaway `mistakes'

GORDON BROWN'S "war chest" for tax cuts and hikes in public spending could contain as little as pounds 3bn, an economic think-tank said yesterday. The Institute of Fiscal Studies warned that the Chancellor could not relax his grip on public finances if he wanted to stay within his government borrowing rules.

In an assessment of the pre-Budget report, the institute said that Mr Brown should not embark on pre-election giveaways unless there was hard evidence that Britain's economy was on a sure footing.

But the institute also said that Mr Brown had given himself room for manoeuvre by quietly increasing the Govern- ment's reserve fund by pounds 8.5bn.

Carl Emmerson, an institute analyst, said that the Government should only relax its tax and spending policies if it was sure that the economy was enjoying a structural - rather than cyclical - improvement. "We don't want to make the mistakes of the past when cyclical improvement was mistaken for fundamental change," he said.

On Monday the Treasury revised up its estimate of the economy's trend growth rate to 2.5 per cent from 2.25 per cent but it used the lower figure for the public finances forecasts.

Mr Emmerson said that the size of the "war chest" would depend on the scale of the revision and the date that the Treasury says it took effect. "An increase to 2.5 percent from April this year would allow a loosening of around pounds 3bn in March 2001," he said.

"If the switch happened in April 1997 then it would be larger numbers but there would be difficult arguments as to why it switched."

The last time the Treasury revised up the trend rate of growth was between 1984 and 1988. However other analysts dismissed the notion that Mr Brown was making the same mistakes that were made in the Eighties, arguing that the Chancellor was being conservative in his forecasts and that he could have room for bigger pre-election handouts without breaking his rule of borrowing only to fund investment.

Marian Bell, of Royal Bank of Scotland, said: "Indeed his [Mr Brown's] forecasts suggest that he could spend pounds 9bn more next year and still meet the golden rule."