Brown lifts taxes to plug gaps in finances

Gordon Brown on Wednesday raised taxes by £2bn on companies and air passengers to help fill an unexpected hole in public finances that constrained his attempt to make education the battleground at the next election.

Despite strong economic growth forecasts, the chancellor’s room for manoeuvre in almost certainly his last pre-Budget report was limited by tight future public spending plans and disappointing revenue forecasts.

Mr Brown signalled education would be the “number one priority” for his premiership and announced allocations for capital spending on schools up to 2011. Yet such was the squeeze on public finances over the next three years that the growth in education capital investment will actually fall from 11.1 per cent over the current spending round to 4.1 per cent for the three years after 2008. However, the chancellor made clear he saw public investment – especially in education – as the key dividing line with David Cameron’s Conservatives.

“The new priority is world-leading investments that will move Britain sustainably ahead of our competitors – the road and rail networks, the affordable housing, the advanced medicine and science and the schools and colleges of the future.”

Alongside education the main theme of the statement was the need to improve skills and boost infrastructure to meet the competitive threat from China and India. “China alone is manufacturing half the world’s computers, half the world’s clothes, more than half the world’s digital electronics and this Christmas, more than 75 per cent of children’s toys,” Mr Brown said.

He gave his backing to proposals for an independent planning body to adjudicate on major infrastructure projects, ending the lengthy delays to important strategic developments.

The most important piece of good news for the chancellor came when he raised the growth forecast for this year to 2.75 per cent and increased his estimate of the long-term sustainable rate of growth in future.

The pre-Budget report conceded that disappointing North Sea tax revenues and higher than planned increases in social security expenditure pushed the budget deficit £5bn a year further into the red from next April.

Mr Brown doubled air passenger duty from the beginning of February to raise £1bn a year. The tax on European economy class flights will rise to £10, long haul economy passengers will have to pay £40 and those in other classes will pay £80. Fuel duty was increased in line with inflation by 1.25p a litre.

Companies bore the brunt of the chancellor’s other tax-raising measures with further curbs on tax avoidance and action to reduce the impact of European Court rulings on government revenues. Though the independent reports commissioned by the chancellor were well received, business organisations saw the pre-Budget report as a lost opportunity.

Richard Lambert, director general of the CBI employers’ organisation, said: “On the critical issue of tax competitiveness, there was silence.” For the Conservatives, George Osborne, shadow chancellor, mocked Mr Brown’s aim of refreshing the Labour government, saying he was equally responsible for the “failures” of the Blair years.