Gordon Brown has built up a huge war chest in advance of the next general election.

According to the influential Institute for Fiscal Studies's Green Budget, the government finances are going so well that the Chancellor could afford to give away up to �7bn in the next budget in March and still meet his fiscal rules.

The IFS has forecast a budget surplus of �7bn for the current financial year, with an even bigger surplus of �10bn in the following year.

That contrasts with the official forecast of a small surplus this year of around �3bn, and a small deficit in the following years.

The growing surplus has been caused by the fall in the number of people claiming welfare benefits, especially the jobseeker's allowance, as the number of unemployed has fallen to just over 1m, compared to government predictions of 1.4m.

Tax give-away

The growing surplus makes it more likely that the Chancellor will be able to make more tax cuts ahead of the next election, while still increasing spending on health.

The IFS estimates that a tax cut of around �2bn to �3bn - equivalent to a cut of 1p in the basic rate of income tax - would enable the government to claim that the tax burden had not increased under Labour.

However, according to the IFS Green Budget, the government could have more difficulty meeting its pledge to raise health spending to the average of other EU countries by the end of the next Parliament.

To do that, an annual real increase of between 5.7% and 9.4% in the NHS budget would be necessary over the next six years, depending on how the figures are calculated. That would be almost double the current rate of increase on health spending, and could put a severe squeeze on extra spending bids by other departments such as education or transport.

Economy purring along

The recovery of the UK public finances is fundamentally due to the remarkable recovery of the economy.

Economic growth in 1999 was stronger than anyone expected, and in 2000 Britain may well have one of the highest growth rates of any major industrial country, with most forecasters expecting GDP to increase around 3% to 3.5%.

That will continue to boost government tax revenues.

However, strong growth is likely to lead to some inflationary pressures, with the Bank of England expected to increase interest rates to around 6.5% by the end of the year.

That could restrict the scope for the government to cut taxes too far, for fear of over-stimulating the economy and undermining the Bank's anti-inflationary stance.

But with the overall tax burden having gone up since the last election, there may still be scope for a tax-cutting, election-winning budget this March.