Brown may pull the rabbit out of the hat again

Last month's data showed a distinct improvement, although, as the charts show, the public finances may have turned around a while ago.

Tax receipts rose sharply in October, bringing the rise for the first seven months of the fiscal year to 7.6%, not far below the budget forecast for the full year of 8.5% growth. Although VAT receipts have been weak because of sluggish consumer spending, income tax receipts have held up well because of rapid rises in employment. Corporation tax receipts are rising rapidly because of strong oil company and financial sector profits. The real surprise in the figures was that spending growth has slowed sharply. It is up 4.1% so far this year compared with the budget forecast of nearly 6%. Public sector employment is growing slower than it was, keeping a lid on overall spending. That is likely to continue given that the government is committed to reducing civil service numbers. Public borrowing is running £5bn below this time last year, suggesting Mr Brown could meet, rather than miss, his forecast of a £32bn shortfall this year. And that would be a refreshing change after the disappointments of recent years.

"If these figures are an accurate indication of trends for the year as a whole, then the chancellor has a fighting chance to meet his borrowing forecasts for the first time in four years," says John Hawksworth of PricewaterhouseCoopers.

The irony, he adds, is that Mr Brown may have been able to meet his golden rule without making a controversial change in the summer to the way the rule is calculated, something that cost him credibility in the City.

As the charts show, the current balance, which excludes public investment and which is what matters for the golden rule, has begun to narrow in spite of weak economic growth. Mr Brown forecast in March that it would shrink from £16bn in 200/05 to £6bn in the current fiscal year. Mr Barrie calculates that if growth had turned out as Mr Brown planned, he very likely would have met the £6bn forecast, even though many in the City derided the forecast as hopelessly optimistic at the time. In any case Mr Brown will be able to forecast a significantly narrower current deficit.

Tax receipts

The intriguing thing is that from 2002 to 2004, Mr Brown got his growth forecasts more or less right but his public finance forecasts badly wrong. For this year, the reverse is true. Growth will come in much weaker than he predicted but the public finances may come in close to target. Quite why this is is not clear but it would seem that a structural, rather than cyclical, improvement in the public finances is going on. And that is what matters for fiscal policy since the Treasury has to be sure it can cover its spending with tax revenues over time, allowing for the ups and downs of the economy.

It is perfectly possible that government spending takes off again in the remaining five months of the fiscal year and that revenues stop improving. But, given that there is talk of record bonuses in the City and big profits in the financial sector - a rich vein of tax receipts for the Treasury - you wouldn't want to bet against Mr Brown at this point.

Some experts think Mr Brown might slap some sort of windfall tax on the oil companies and banks, both of which have announced record profits this year. He has done such things before and they are an important short-term source of revenues. Also, neither vote.

The chancellor is also quite likely to signal that public spending growth, which has increased rapidly since 2000, will be held well below the economy's long-term trend growth rate of 2.5%-2.75% for the next few years. Taken together, those two moves would likely be enough to bring the public finances back into a sustainable position. As for big tax rises on the rest of us, we can relax. Would Mr Brown really want to be putting income tax or VAT up just as he moves to No 10?