Gordon Brown yesterday launched Labour’s election manifesto for 2008 or 2009. His 50-minute statement may have been called Budget 2007 but the key tax measures do not come into effect until April next year, opening the way for a general election later that spring or summer if the polls are favourable for Labour.

Far more important than the familiar combination of boasts about his growth and inflation records and of complicated tax changes was the underlying political, and electoral, theme of dishing David Cameron. Of course, chancellors always enjoy a tactical advantage on Budget day in capturing the initial headlines, but often, like yesterday, second impressions are likely to be more qualified.

The main proposals — notably the two-point reductions in the basic rate of income tax and in corporation tax — were aimed at outmanoeuvring the Conservatives. There were the now trademark Brown references to “representations” he had received (that is Tory proposals) on putting VAT on airline tickets; for a return of the married couples allowance and for transferable tax allowances between husbands and wives with children under five; and a third fiscal rule (sharing the proceeds of growth between public spending and tax cuts). He then demolished each in turn to loud Labour cheers, before the final coup de théâtre of the income tax announcement.

But closer examination reveals a less generous Chancellor and more of “a give with one hand and take back with another” Budget. Despite talk of cuts, the tax burden will rise over the next year before arriving at a plateau.

Admittedly, the economic outlook remains benign, with economic growth expected at close to 3 per cent for the next couple of years, with a better balance between consumption and investment than in the past. Inflation is also projected to decline to within the target range after the recent blip upwards. But the fiscal outlook looks pretty tight, with public borrowing forecasts revised upwards by about £4 billion a year because of a shortfall in North Sea oil tax receipts.

Consequently, there is little room for manoeuvre. Cuts in rates of company taxation will be financed by a change in the structure of capital allowances. Similarly, the abolition of the 10p starting rate of income tax pays for the 2p cut in the basic rate. Other offsets include an increase in the age allowance, and in child and working families tax credits, balanced by increases in the upper earnings limit for national insurance contributions. Overall, a cut in some personal taxes of £13.2 billion in 2009-10 will be financed by £10.7 billion rises in other personal taxes, for a net reduction of nearly £2.5 billion. That, in turn, is financed by a big increase in business rates on empty property and increases in fuel duties and other green taxes.

The bottom line of Uncle Gordon’s magician act is that households will be on average £100 a year better off. Four in five households will be better or no worse off. The main gainers will be low-income families with children and pensioners, and the losers will be single people who do not qualify for tax credits in the £6,000 to £17,000-a-year range, and some people in the £33,000 to £38,000 range hit by higher national insurance. In political terms, there will be a balance between the welcome for the 2p cut headlines and then the realisation of the tax increases elsewhere.

The most important guide to Brown’s Britain lies in the announcements on public spending. Forget the large increases in cash budgets that Mr Brown highlighted. The real story is that from April 2008 public spending will grow by an average of 2 per cent a year in real terms until 2011. This is not only less than the expected growth of the economy but compares with annual increases of more than 5 per cent earlier in the decade.

This means that life is going to pretty tough for many departments, with a further big squeeze on administrative costs. The Home Office Budget has been frozen and, after 5 per cent real-terms cuts in central departments such as the Cabinet Office and the Treasury, as well as Work and Pensions, the Attorney-General’s department now faces a 3.5 per cent a year cut in real terms each year. So any relief in the the Education Department will be tempered by the realisation that a 2.5 per cent a year annual real increase from 2008 is half its recent rate of expansion.

Mr Brown has, however, deferred until the autumn decisions on future spending on health, defence, international development and local government. The delay from the usual July is for political reasons because of the handover in 10 Downing Street and subsequent reshuffle. But, with health likely to be favoured, there will be tough bargaining over the defence budget, which is likely to be settled after the departure of Tony Blair, who has always been sympathetic to the Armed Forces.

Mr Brown has posed a problem for the Tories. Mr Cameron shrewdly accepted Mr Brown’s spending plans in the hope of closing down taunts about Tory cuts. But on tax Mr Brown has stolen Tory clothes. It is all very well for Conservative leaders to complain about a “tax con not a tax cut”, but their options have been narrowed. That will intensify the Tory debate about a shift from direct to green taxes.

For all the doubts of senior civil servants about whether he can run a cohesive government, Mr Brown yesterday underlined his formidable political talents. Closer scrutiny may reveal the flaws and drawbacks in his proposals. But he can still set the agenda. Mr Cameron and the Tories underrate Mr Brown’s determination and skill at their peril.

Budget 2007

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