Financial services, creative industries and medical research sectors are set to be the core focus of Gordon Brown’s Budget on Wednesday, as the chancellor seeks to equip the UK to meet the challenges of globalisation.

As he prepares to unveil his 10th Budget, Mr Brown is not expected to make any significant changes to taxation or spending in the £550bn budget. Instead, he will introduce measures to lock in the £7bn reduction he wants in borrowing for day-to-day public expenditure in 2006-07.

For Mr Brown, who is almost certain to lead Labour into the next general election, the Budget will be politically significant as it will be the first time he faces David Cameron as Conservative leader across the floor of the Commons.

The chancellor is therefore expected to use the occasion to challenge Mr Cameron on two central issues - the environment and social justice - where the Conservative leader is clearly trying to challenge Labour’s record.

Mr Brown is expected to announce this week that the economy and public finances are on course to meet his downwardly revised economic forecasts for 2005-06. Ed Balls, Labour MP and former treasury adviser, told Sky News on Sunday: “On the economy, on growth, also on the public finances, the numbers are coming in as the Chancellor was expecting.”

With oil prices remaining high, Mr Brown is expected for the fourth year running to postpone the inflation-linked increase in fuel taxes.

However, he will act to underscore his green credentials - and counter those of the Conservative leader - by adjusting the rates of Vehicle Excise Duty to give a greater incentive for people to buy fuel-efficient cars.

New cars bought after the Budget which emit the highest levels of carbon dioxide - including many 4x4 vehicles - will face a slightly higher rate of up to £200 a year, while the cost of a tax disc for the least polluting vehicles will fall.

Following a review last year of the performance of Britain’s creative industries, Mr Brown is expected to announce an extension of R&D tax credits to cover medium-sized companies.

However, it is thought the chancellor is unlikely to unveil any significant proposals relating to pensions, leaving these to a White Paper to be published later in the year.

One of Mr Brown’s toughest decisions will be whether to extend last year’s £200 payment to people over 65 to help with council tax bills. If he decides against extending the payment, he will be accused of cutting the incomes of pensioners, and of using last year’s increase as a cynical election ploy to win pensioners’ votes. The cost of extending the support is £800m a year.

The challenges facing the economy are highlighted by the Bank of England’s latest survey of the public’s expectations of inflation this year. On average, people expect prices to rise by 2.6 per cent, the highest figure since the Bank started the survey in 1999, diminishing the chances of a rate cut in the near future even further.

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