Gordon Brown plans for the long term. His aim in the first parliamentary term was to establish a robust economy and a reputation for sound economic management.

However, this was never an end in itself. It was a means to a traditional goal: redistribution of income to what Mr Brown would not dare to call the deserving poor - children, pensioners and those adults prepared to work - and, still more, higher spending on public services. On Wednesday, he used the first Budget of the parliament to show what this means.

The National Health Service - tax-funded and free at the point of use - is for Mr Brown and his party the crowning achievement of Labour in the last century. The government has now made refurbishment of this battered totem of mid-20th century socialism the highest domestic priority for the early years - or rather decades - of the 21st. It is a big gamble. But it also sets before the British people a grown-up choice: do they want to pay more tax to fund better public services or not?

The Budget promises are certainly bold. Over the five years to 2007-08, the plans are for total spending on the NHS to rise at 7.4 per cent a year in real terms. Excluding spending on health, current spending is to grow at 2½ per cent a year in 2004-05 and 2005-06. Total growth of current spending over those years is to rise at 3.3 per cent. Meanwhile, net public investment is also forecast to rise from 1.8 per cent of gross domestic product in 2003-04 to 2 per cent in 2005-06.

The political implications of these plans seem obvious enough. Mr Brown is trying to define what a Labour government is for. But what are the economic and fiscal implications?

The planned increases in revenue from national insurance are eye-catching - £8.6bn from an indexed base in 2003-04 and £9.1bn in 2004-05. But this is still only some 0.8 per cent of gross domestic product. Even if one treats the child tax credit and working families tax credit increases of £2.45bn in 2003-04 and £2.3bn in 2004-05 as public spending, not negative taxation, the overall annual increase in taxation from the measures is well below one per cent of GDP.

For the same reason, the implications for the fiscal burden must be kept in proportion. The Treasury forecasts that the ratio of current receipts to GDP will rise from 39.1 per cent of GDP last year to 40.5 per cent in 2006-07. The ratio of taxation to GDP will be some five percentage points of GDP higher than in 1993-94, but that was a year of unsustainable fiscal deficits. The ratio of current spending, plus net investment, to GDP will rise from 37.9 per cent of GDP last financial year to 40.6 per cent by 2006-07.

That the implications of the plans are not enormous follows from the growth assumptions. The chancellor is forecasting revenue and spending on the basis of a trend growth in the economy of 2½ per cent a year, up from the 2¼ per cent previously assumed. This is still a quarter of a percentage point below the newly increased assumption about the trend rate of growth. If the economy grows at this rate, the planned annual real growth in overall current spending in 2004-05 and 2005-06 is only 0.8 percentage points higher. This is no huge margin.

Given the somewhat more optimistic assumptions about economic performance, the fiscal position survives pretty well intact. As a share of GDP, public sector net debt rises from 30.4 per cent last year to 31 per cent in 2006-07. The current budget remains well in surplus, though this falls from 1.1 per cent of GDP last year to 0.3 per cent this year, before rising to 0.7 per cent in 2006-07.

Given the chancellor's reliance on the golden rule - which allows borrowing for investment - and his commitment to higher public investment, net borrowing now rises to 1.4 per cent of GDP by 2006-07, against a mere 0.1 per cent last year. Most of the increase is forecast to happen this year, with a jump to net borrowing of 1.1 per cent of GDP. But Mr Brown is raising two fingers to the eurozone's growth and stability pact, with a planned general government deficit of 1.5 per cent of GDP by 2006-07. Is this reckless? Hardly.

In raising the assumed trend by aquarter of a percentage point, the Treasury is falling in line with other forecasters, including the International Monetary Fund. It is not assuming a jump in productivity growth. This seems fair enough, since I, for one, remain unconvinced that the shower of pro-enterprise measures the chancellor is determined to pour on business will make much, if any, difference.

This year the Treasury forecasts growth at 2 to 2½ per cent, though it is forecast to rise to 3 to 3½ per cent in 2003 and 2½ per cent to 3 per cent in 2004. The figures for 2003 and 2004 look optimistic given the imbalances in the economy and the possibility of a sharp sterling correction and inflation spike. But the Treasury has been a remarkably successful (perhaps remarkably lucky) forecaster in recent years.

The conclusion, then, is that Mr Brown has indeed laid the ground well for the government's new "tax and spend" course. The economy and the public finances can bear the strain. The increase in tax burden, though evident, is not by any means large.

This does not mean that the fundamental decision taken by the government to go for higher spending on health is not open to challenge. First, it should be stressed that national insurance is, like the social charges Mr Brown despises, a tax on employment alone. Second, there has been no serious attempt to argue that health spending is so much higher a priority than anything else.

Last but not least, the question is whether this shower of gold will generate a noticeably improved quality of service. That improvement will surely need to be evident by the next election. But improvements in health services are inevitably slow to materialise, given the time it takes to build facilities or train new doctors.

The government's nightmare must be that nobody notices a difference in time. If so, those increased tax bills, with more to come in the next parliament, will look far more unpleasant. The government has taken a bold step. Now it must do more than deliver; it must be seen to do so.

Contact Martin Wolf

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