UK government finances are in even better shape than had been thought, giving Chancellor Gordon Brown a perfect platform for Tuesday's Budget.

Far from borrowing to cover public spending, buoyant tax revenues gave the government a �2.7bn surplus last month, according to figures from the Office for National Statistics.

The chancellor's "war chest" of potential spending money has been the source of much speculation ahead of the Budget.

There have been press reports of differences between the Prime Minister, Tony Blair, and Mr Brown over whether to opt for another income tax cut or concentrate resources on boosting health and education spending.

Breaking records

The public sector net cash requirement (PSNCR) statistics showed that the �2.7bn was the highest February surplus on record - and almost twice what had been expected.

This means the total surplus in the 11 months of the 1999/2000 year to date is �15.7bn, the highest for 11 years.

The underlying measure of public finances, the less volatile public sector net borrowing (PSNB) preferred by Mr Brown, showed a surplus of �1.3bn.

This produces a year-to-date surplus of �17bn, almost �10bn better than the same period a year earlier.

Embarrassment of riches

The amount of money in Mr Brown's "war chest" is now so huge it could prove an embarrassment to him as he delivers his fourth Budget.

As recently as November, he forecast that PSNB would finish the year to the end of March in surplus by just �3.5bn.

Although March traditionally sees heavy year-end spending by government departments, economists expect the full-year surplus to be well in excess of �10bn.

Traditional Labour supporters and backbenchers have been calling for more state spending when the coffers are so full.

But Mr Brown is not expected to go on a spending spree in the Budget, preferring to keep to a cautious fiscal policy, complementing the Bank of England's tightening of monetary policy to choke off inflation.

The chancellor has encouraged the Bank's governor, Eddie George, to take a firm line with interest rates.

The Bank was briefed ahead of this month's interest rate meeting on the broad outline of the Budget and did not raise rates, suggesting it contains no vote-chasing round of spending.

Moderation

Mr Brown's approach has been criticised as over-cautious by some, who argue that there is room for more economic expansion and that he could be over-tightening fiscal policy.

Many economists expect the chancellor to cut taxes overall by a modest �2bn to �3bn so that he can claim to be keeping down the overall tax burden (government receipts as a proportion of gross domestic product).

Labour gave an undertaking not to increase the tax burden before it came to power in 1997.

He is also expected to confirm that this summer's comprehensive spending review will include more funds for the government's priority areas of health and education.