Juli Collins-Thompson
BNP Paribas

The 2002 Budget confirmed that "Old Labour" style fiscal policy is slowly resurfacing. The massive rise in public expenditure was on the larger side of expectations but, unsurprisingly, directed at the NHS, after years of underspending and underinvestment. Gordon Brown also stuck by his characteristic run of micro-style measures - to the benefit of enterprise, pensioners, working families and the environment.

With regard to the implications for monetary policy, the key point is what this Budget implies for the overall fiscal stance. Mr Brown has largely offset the stimulus of spending cuts with tax increases, leaving the net fiscal position in the coming three years little changed from the projections in the pre-Budget report. The change in the cyclically-adjusted Budget balance out to 2004/05 indicates a fiscal ease of about 1 per cent of GDP. The Bank of England's monetary policy committee has already incorporated such a scenario in its economic outlook, and thus does not change my view that the Bank will hold off hiking rates until the third quarter.

However, there is the question of what the rise in national insurance taxation for employers will mean for the inflation profile further out, given the associated rise in employers' cost base. The improved outlook for growth, which looks realistic in our opinion, was behind the moderate downward revisions to the Treasury's borrowing projections out to 2003/04. Yet, public borrowing is expected to deteriorate further out to its highest levels since 1996/97.

Simon Rubinsohn
chief economist, Gerrard

This was always going to be a Budget designed to provide more resources for the NHS and, in this respect, the chancellor did not disappoint. While the magnitudes involved are large, they are in truth not far away from expectations.

However, there were a number of surprises that could yet have ramifications for Gordon Brown's overall strategy. For a start, the increase in the trend rate of growth means that the fiscal arithmetic even on the most cautious case is based on more upbeat economic assumptions than was felt to be appropriate last year. Whether this change is warranted is a point for debate but it does crucially increase projected receipts and thus provides the scope to raise spending levels significantly while also lifting the projected surplus on the current Budget.

The other big unexpected development was the increase in national insurance contributions on employers. The risk here is the knock-on effect on profits could have some adverse impact on planned investment which, interestingly, the Treasury forecasts see as playing a key role in driving growth next year.

Although the actual level of borrowing for this financial year is slightly lower than projected in the pre-Budget report it is hard to make the case that the chancellor is tightening policy in the near term. The minutes of the April meeting of the monetary policy committee suggest that the authorities are willing to give consumers a little more time to moderate spending but it is improbable that the tax-raising measures designed to take effect from next year will have much immediate impact on high-street activity.

Ian McCafferty
Confederation of British Industry chief economic adviser

In opening his Budget, the chancellor highlighted the "challenge of enterprise" - the need to stimulate entrepreneurship. He then announced a number of measures to achieve this aim. But, having given with one hand, he quickly took it all back with the other.

The measures on R&D tax credits and training initiatives were steps in the right direction, the additional help for smaller businesses to focus on employee training, through assistance with the costs of Investors in People, was very welcome. The CBI had also sought the R&D tax credit, though to be fully effective it needs to be big enough to change business behaviour. The amount allocated could have been closer to £1bn than the £400m announced. Other cuts in taxes for small and medium-size enterprises were also of value.

But the rise in employers' national insurance contributions from 2003 overshadows these benefits. As a result, rather than starting to roll back the business tax burden, this Budget has increased it by a further £2bn. Although delayed a year, the rising cost of employment will hit businesses hard. It could tip some companies from profit into loss, at which point tax credits on profits cease to have relevance.

Some of the increased spending on the NHS comes not from "real" tax increases but from shifting the assumptions underlying the fiscal projections, with the underlying annual GDP growth assumption nudged up from 2.25 per cent to 2.5 per cent. This adds £1bn-£2bn to the annual pot in future years.

Nevertheless, consumers have also been hit, with a net tax rise of £500m over the next two years. The one silver lining is that the damping of consumer sentiment that will result should give the monetary policy committee more room to hold interest rates at current levels for some time.

Michael Hume,
Lehman Brothers Global Economics

This is the first tax-and-spend Budget since Denis Healey's inaugural Budget of 1974. It is highly redistributive, with middle-and high-income earners being asked to pay for higher spending on public services and welfare payments. So, is this a New Labour or an Old Labour Budget? Most definitely New Labour. Although bigger than expected, the tax-and-spend measures announced yesterday are still small, amounting to less than 1 per cent of GDP over four years. That is a mere fifth of what Old Labour put into effect in 1974-6. However, the chancellor has become less cautious in his projections. He has raised the trend rate of GDP growth and factored in about £1bn of extra revenues from anti-avoidance measures, both of which might prove hard to achieve. Consequently, while the government's finances remain on a sound footing in the near term, they are looking increasingly vulnerable to a downturn in economic fortunes further ahead.

The fiscal impact on the economy is negligible and will not alter the trend towards growing economic convergence between the UK and the euro area. Consequently, the chancellor has left the door wide open for a positive assessment of his "five tests" early next year. However, he has done little to deal with the problem of sterling's overvaluation.

The tax hikes on the personal sector will encourage the Bank of England's monetary policy committee to expect a slowdown in consumer spending. But crucially, the interest rate outlook will be determined by what happens to the global economy over the next six months. On that front the signs remain positive, so base rates are still likely to end the year at more than 5 per cent.

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