Budget 2008: Chancellor 'boxed in', tax cuts off

Alistair Darling is boxed in as the economy heads into uncharted waters, warns accountancy firm KPMG, so tax cuts seem unlikely

Andrew Smith, chief UK economist, explained the budget next week will see fiscal rules being bent, "if not outright broken and/or rewritten".

"With budget day fast approaching, the chancellor finds himself rather boxed in by his predecessor's rules at a time when the economic outlook is looking distinctly unclear," he said.

Mr Smith explained the government's 'sustainable investment' rule of keeping government debt to 40 per cent of GDP has been blown by Northern rock liabilities being taken onto public finances.

Also Gordon Brown's 'golden rule' of keeping spending within limits of revenue over the economic cycle will be risked in an economic slowdown.

The upshot for the public is that major tax increases or cuts are off the cards.

"Dramatic tax increases or spending cuts are unlikely. It makes little sense to tighten fiscal policy going into an economic slowdown," said Mr Smith.

"Given current uncertainties and the risk of a policy tightening propelling us into a downturn, it may be best to opt for a neutral package.

"Cutting taxes looks dangerous on public finance grounds but raising them carries economic risks."

Meanwhile the chancellor is expected to outline a new mortgage rating system to revitalise the wholesale money markets and funding for mortgages.

Plans are thought to involve a grading of mortgages so lenders can sell mortgage books more easily to investors, so bringing an end to the credit crunch.

Mr Darling unveiled plans for 'gold standard' mortgages in a speech last month.

He said: "We want to see a greater availability of affordable long-term fixed-rate mortgages.

"For many households, particularly those on low incomes, fixing the level of mortgage repayments for several years makes real sense – it can also contribute to wider macroeconomic stability."