For his final curtain call as Chancellor, Gordon Brown delivered a truly big Budget. He broke with his own recent past by sharply cutting the headline tax rates for individuals and businesses and taking the first steps towards simplifying an over-complex taxation system.
It is a tribute to Brown's mastery of the Treasury that in his tenth year in office he is still capable of taking far-reaching decisions on the way the nation's finances are managed. This is made easier by the fact that Britain is enjoying a golden period of economic expansion stretching back over the ten years of the Chancellor's stewardship. It means that Brown will leave the Treasury on a high note.
His last Budget also represents a sharp change of direction. Since Brown decided to lavish a fortune on the NHS eight years ago, the Budgets have all been about expanding the public sector, which has grown at a phenomenal rate of 5% a year after inflation.
But the glory days of big spending are now over. The extra NHS spending that Brown referred to in his Budget speech yesterday has already been announced. The stark reality is that under the new public spending settlement, which will be unveiled in the Autumn, average real growth in public spending will be just 2% - which will mean that in some cases there will have to be actual cuts.
Some departments are taking genuine cuts. Only education is singled out for extra spending and it will be receiving an increase of just 2.5% above inflation. Brown's successor at the Treasury is likely to continue to wield the axe, rather than dishing out the largesse. By all accounts Brown and his colleagues have actually been listening to the criticism of his economic management by the Organisation for Economic Co-operation and Development, the International Monetary Fund and others. The Chancellor has decided to draw in the claws of the state and focus instead on restoring Britain's global competitiveness. The cut in the headline rate of corporation tax to 28% will mean it is substantially below the 34% rate in France and 38% in Germany.
It is a radical change directly aimed at keeping Britain an attractive place to locate for the new light-footed businesses which will dominate the 21st Century including financial services, pharmaceuticals and the creative industries.
The Budget pays for this tax reduction by removing allowances which largely benefit older industries - such as the energy utilities (many of them foreign owned) - which have been able to claim allowances on old plant dating back to the Second World War.
By lowering the main corporation tax and removing out-dated allowances, he has made a key move towards simplification of the system - and stolen one of the key reforms proposed by the Tory tax commission. Simpler taxation is also at the heart of the personal tax changes. By cutting 2p from the basic rate of income tax and abolishing the 10p band, which was introduced in Brown's 1999 Budget, it means there will now be just two bands: 20% and 40%.
Moreover, for the first time the thresholds for paying income tax and national insurance will be the same - a reform called for by the Institute of Fiscal Studies. We may be a long way from 'flat taxes' (where there is just one rate of tax for both individuals and corporations) in the newly emerging markets of Eastern Europe, nevertheless the system should be easier to understand.
Although some will be worse off, the net impact of the mass of personal tax changes will be that overall the public will be paying £2.5billion less in income taxes. This reduction-will be largely paid for by the extension of green taxes, most notably on gas guzzling cars and a new tax on property companies who leave shops empty on our high streets.
By using tax reductions to drive the economy, rather than public spending, Brown is recognising the importance of the wealth-creating sector of the economy. Something he has been loathe to do in the past when he has relied on public spending to boost output.
In this latest Budget, however, Brown is having to deal with a sharp drop in the tax revenues from the North Sea as production declines and the world oil price falls. He will be borrowing an extra £12bn over the next five years above and beyond what was forecast in December's pre-Budget Report.
But he will continue to abide by his own fiscal rules. The 'golden rule' which requires borrowing only for investment in infrastructure is met and overall debt as a proportion of the total output of the economy remains below 40% at 38.2%.
There will be much quibbling in the City, from the IFS, other think tanks and the Tories about these figures. Brown is accused of using 'off balance sheet' borrowing, through the private finance initiative, and selling public assets to remain on target.
Yet the fact remains that the Chancellor, in his ten years, has changed the nature of the British economic debate. It is no longer about missing the target for the Budget deficit by tens of billions of pounds - as was the case previously - but is focused around rules which are designed to enforce prudence.
It would, of course, be far better had the Chancellor taken the opportunity to trim the public sector much earlier during his reign.
The main concern for the Government now is that the next rise in interest rates will slow growth. Yet the financial markets and business will find it hard to bet against the output projections of a Chancellor whose figures have often proved right. This is especially true now that, in his last weeks in office, he has discovered the awesome power of lower tax rates.
Alex Brummer, Daily Mail
