Politics or prudence? Brown faces dilemma

By Christina Fincher - Analysis

LONDON (Reuters) - Prime Minister Gordon Brown insisted on Thursday he would not break the fiscal rules he has followed since 1997, but his backing for a package of tax cuts this week leaves him sailing very close to the wind.

Faced with a possible rebellion by Labour Party legislators over his decision to abolish the lowest income tax band, Brown and his government announced a 2.7 billion pound package on Tuesday to compensate the bulk of those affected.

The move averted a full-scale government crisis days before a crucial by-election. But it also left the country's already strained public finances in an even more precarious position.

Government forecasts in March showed public sector net debt rising to 39.8 percent of gross domestic product in 2010-11, just a whisker below the government's self-imposed ceiling of 40 percent.

The Institute for Fiscal Studies calculates that the 0.02 percentage points of leeway implied by the March forecast equates to 2.8 billion pounds in nominal terms.

"The 2.7 billion pound tax package effectively uses up all the government's room for manoeuvre," said Carl Emmerson at the

IFS.

"Even on its own forecasts, the government only has a 50:50 chance of meeting its rules. Using forecasts from private economists or the International Monetary Fund, the chance is much lower."