Brown keeps all sides happy with his balanced budget

The British Chancellor of the Exchequer produced a budget yesterday that will please almost everyone.

The overall stance of the budget was positive for interest rates, for sterling, for small business, for e-commerce and for less well off families with children - at least in the medium term.

Mr Brown managed both to increase public spending on services, such as health and education, by around £4 billion sterling (€6.5 billion) as well as cut taxes and repay around £12 billion sterling in debt, the most since the boom in the late 1980s when Baroness Thatcher was prime minister.

Mr Brown could have chosen to increase spending and reduce taxes by far larger amounts. The fact that he opted not to do so is likely to please the Bank of England's monetary policy committee.

After all, spending is falling both on debt repayment and on social security, giving the Chancellor significant room for manoeuvre. Interest rates now stand at 6 per cent and, according to Mr Jim Power, chief economist at Bank of Ireland, they should not rise above 6.5 per cent as the bank will look at the overall fiscal tightening with some approval.

Although economic growth is expected to accelerate this year - which could lead to interest rate nervousness in the short term - it is predicted to begin to slow down again next year, which should prove positive for interest rates in the medium term, according to Mr Power.

Markets reacted well to the budget. According to Ms Marian Bell, chief economist at Royal Bank of Scotland, the measures will be positive for the bond markets and will ensure that interest rates will be lower than they otherwise would have been.

As a result, sterling may start to fall back slightly over the remainder of this year, a move which would please the British manufacturing sector as well as many Irish importers who have been facing rising costs when importing goods from Britain. Anything which prevents a repeat of complaints from export-dependent manufacturers such as BMW, which last week announced the sale of Rover Cars to Alchemy Partners, will be welcome. On the margin, it will also mean good news for Irish inflation as some imported goods have been rising in price, adding to the inflation rate here.

The Chancellor also tackled British house price inflation, which had been running at up to 25 per cent in the south-east, by increasing stamp duty. It is now 3 per cent on homes above £250,000 in value and 4 per cent on those above £500,000.

Overall, according to Mr Power, this is a budget which recognises the realities of the new economy. Small business received significant tax breaks, capital gains tax is being reduced to 10 per cent over four years and share option incentives for up to £100,000 are being introduced for employees. Additional work permits are being granted for skilled workers and 100 per cent allowances are being introduced for computer equipment purchases as well as Internet training.

This is a radical package and could make a big difference in ensuring that Britain is successful in its aim of becoming a centre for e-commerce. It also recognises the importance of socalled non-wage remuneration in controlling overall wages growth, a lesson which the Irish Government could do well to heed in the current heated environment.

In comparison, according to Mr Power, the Government here has hardly even reached the starting blocks.

The British income tax system also remains more competitive than the Irish. The starting rate of 10 per cent and the standard rate of 22 per cent are more competitive than the Irish system where the higher rate is payable at a far lower income level.

The British government does not appear worried about next year's election but the one after is a different story. Mr Brown said that the budget would return to deficit from 2003, indicating the government will pledge spending increases to boost its electoral chances. The deficit will total £27 billion between 2003 to 2005.

But for 2001 the government predicted a budget surplus of 0.5 per cent of gross domestic product, compared with a forecast made a year ago for a surplus of 0.2 per cent.

Mr Brown is also eliminating withholding tax on international bonds, strengthening the dominance of London's $3 trillion (€3.1 trillion) bond market over rival European markets. The move could aggravate tensions with other European Union governments, which have pushed for a Europe-wide tax on interest from savings.