MPs grill Brown over pre-budget sums

Gordon Brown today insisted that he would meet his fiscal rules amid growing scepticism about his sums on the public finances.

Defending himself against accusations that the public finances are running out of control, the chancellor told the parliamentary Treasury select committee that his borrowing plans were affordable.

"We are meeting our fiscal rules and will continue to meet our fiscal rules," he told the committee following his week's pre-budget report last week.

Under his two self-imposed rules on the public finances - Mr Brown can only borrow to invest over the economic cycle - his "golden rule" - and he has to keep overall debt at a prudent and sustainable level.

While Mr Brown will have little trouble on overall debt, he is running a gauntlet of criticism on his golden rule. Peter Spencer of the Ernst & Young Item Club, which uses the same economic model as the Treasury, has accused the chancellor of being in denial over his borrowing projections.

Mr Spencer said the Treasury was "reliant on some wildly optimistic assumptions" for its forecast that the budget deficit will peak at ?37bn this year and then taper off in the coming years.

In his pre-budget report, Mr Brown conceded that public sector net borrowing would hit ?37bn in the current fiscal year, ?10bn more than his forecast in the April budget. Over the next five years, Mr Brown plans to borrow an extra ?34bn in total. The chancellor said he could not have anticipated the cost of the war in Iraq which had been higher than expected.

In other testimony, Mr Brown said growth in house prices and consumer demand has been moderating recently and that he expected the economy to be able to sustain more balanced growth. Economic data released today showed that retail sales and mortgage lending grew at a slower pace in November after the first rise in interest rates for almost four years.

The Office for National Statistics (ONS) said retail sales grew just 0.1% on the month, after three months of very strong growth, to give an annual growth rate of 3.7%. The monthly growth rate was the weakest since July.

The British Retail Consortium and the Confederation of British Industry have also reported weak retail sales in the run-up to Christmas. But analysts suspect that customers are holding off in expectation of steep discounts just before Christmas Day.

"Although the monthly growth rate is somewhat slower, the three-monthly figure is still robust. If this trend continues, I think the Bank of England might still have to raise interest rates next year," David Page, an economist at Investec bank, told Reuters.

Separately, the British Bankers' Association said lending secured on dwellings rose by an underlying ?4.8bn last month, considerably less than the record ?6.1bn increase reported in the month before.

The Bank of England raised interest rates by a quarter point in November, reversing its precautionary cut earlier in February. Earlier this month, the Bank's monetary policy committee voted 8-1 to hold rates steady to wait for any effects of November's rate rise to show through.

Andrew Large, the deputy governor in charge of financial stability, was the lone dissenter, arguing that further monetary tightening was needed to deter consumers from over-borrowing.

The ONS also released public finance data showing a smaller-than-expected public sector net cash requirement of ?5.8m last month. The narrowing was caused by lower spending rather than an improvement in tax receipts.

City analysts believe that tax receipts are unlikely to reach the levels seen during the internet boom of the mid-1990s. That, coupled with the surge in public spending, will force Mr Brown to borrow more than he anticipates.

As a result, analysts think Mr Brown will probably be forced to raise taxes late in this parliament or early in the next, to meet his golden rule of balancing the books over the economic cycle.