UK Budget: Higher borrowing levels needed

British Chancellor Gordon Brown today said that the budget deficit would be higher than previously expected over the next two years.

Mr Brown also said the Treasury would borrow more money than originally planned in the next financial year to fund spending, but insisted that he was on target to meet his key fiscal rules.

And the Chancellor painted a rosier picture of UK finances from April 2007 as he predicted a return to budget surpluses and lower borrowing figures.

Making his 10th Budget speech in the House of Commons, Mr Brown stuck with the growth forecasts he made at the time of his pre-budget report in December.

This meant that the UK economy should grow by 2% to 2.5% this year rising to 2.75% to 3.25% in 2007 which Mr Brown said heralded an unprecedented period of stability since his first budget in 1997.

He said inflation was on target at 2% and long-term interest rates were “the lowest they have been for 40 years”.

The Chancellor adjusted his budget deficit forecasts from £10.6bn to £11bn for this year and from £4bn to £7bn next year.

He also said that net borrowing would be the same as previously forecast in the current financial year at £37bn, but upped his estimates from £34bn to £36bn over the following 12 months.

But he forecast a surplus of £1bn in 2007-08 rising to £7bn, £10bn and £12bn thereafter – ensuring that his key Golden Rule was met by a margin of £16bn.

Mr Brown also said borrowing would fall to £30bn in 2007-08 and £23bn in 2010-11 and remain well below 40% of GDP – meeting his second fiscal rule, the Sustainable Investment Rule.

The Chancellor said the UK economy was “strong and getting stronger” and there would be “no return to boom and bust”.

Investec Securities economist Philip Shaw said there appeared to be few shocks in the statement which stuck closely to the outlook given in December.

“I think the Chancellor’s medium-term economic forecasts are on the optimistic side,” he said.

“We think growth will be closer to 2.5% than 3% and our view of the public finances is that we are going to see a slower improvement in the fiscal position.”