THE chancellor will next week announce his toughest limits on public spending since shortly after Labour came to power in 1997.

In Gordon Brown’s pre-budget report on December 5 he will say that government departments will have to hold their spending below the rate of growth of the economy for the three years from 2007, during which time he expects to take over from Tony Blair as prime minister.

Brown’s tough approach to spending is aimed at heading off a politically unpopular hike in taxes and also at wrongfooting the Tories.

David Cameron and David Davis, the Conservative leadership challengers, have said that they will be able to increase public spending and cut taxes at the same time.

Cameron has said he will share the proceeds of economic growth between extra public spending and lower taxes. Davis has said he will make room for £38 billion of tax cuts by restricting the growth of public spending below that of the economy as a whole.

Brown intends to demonstrate that even with tight controls on spending there will be no “pot of gold” for tax cuts.

In his pre-budget report Brown will announce that spending by government departments will rise by 1.9% a year in real terms over the period 2008-9 to 2010-11, below the economy’s long-run growth rate which is estimated by the Treasury to be 2.75%. Public investment on infrastructure such as roads and buildings will rise in line with growth.

Brown’s plan will mark the end of the period of rapid growth in spending for all departments. He will say that the government has corrected the “historic underspend” and that the time has come to “lock in” fiscal stability.

This will mean slower growth in spending even in the government’s priority areas of health and education. After the Wanless report that he commissioned, Brown increased National Health Service spending by more than 7% a year in real terms, lifting the total from £33 billion in 1996-7 to a planned £92 billion in 2007-8.

Although detailed discussions with ministers have yet to take place, the new spending targets imply much slower growth in NHS spending from 2007-8.

Education spending has been rising by 4.4% a year, but this is also set to slow. The biggest squeeze, however, will come in other areas.

Brown’s reluctance to give a blank cheque on state pensions in response to this week’s Turner report reflects his determination to hold down social security spending.

The pre-budget report comes amid continued criticisms of Brown over his handling of the economy. Growth this year is expected to be only half of the 3%-3.5% rate that he predicted in his March budget, before the general election.

The Ernst & Young Item club, which uses the Treasury’s model of the economy, says in a report today that Brown is likely to break his “golden rule” of borrowing only to fund public investment because of the gap between government spending and tax revenues.

Peter Spencer, chief economic adviser to the club, said: “Brown is still left staring into an £11 billion abyss. How he intends to plug this hole is anyone’s guess.”

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