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The Chancellor, Gordon Brown, is about to unveil his pre-Budget report.

This gives us a good idea of what'll be in next year's Budget.

Baker Christopher Freeman is hoping small businesses like his will get a good-sized slice of the Chancellor's spending cake.

Dunn's Bakery in North London is Christopher's business. It's a family firm.

The bakery produces more than 1,000 pastries and cakes and 550 loaves of bread each day.

Christopher employs 45 people. And he's hoping his labour costs won't rise as a result of the Budget.

"With regards to National Insurance contributions , the employer's share of it is already over 11%. That means that every �100 I pay an employee, I'm paying over �11 to the government in tax," says Christopher. "I'm concerned that National Insurance contributions could rise, pushing up our labour costs."

Carving up the cake

This is just one of the dilemmas facing the Chancellor in his pre-Budget report.

He has to make sure he gets the balance of tax and spending right.

As well as the usual spending commitments like health and social security, there are other burdens to consider this year such as:

the cost of the foot and mouth crisis

the military action in Afghanistan

the economic downturn.

"The Chancellor thought he'd have a few bob in his pocket with the economy going well and inflation under control," says John Whiting, tax partner at accountants PricewaterhouseCoopers.

"But clearly the economy isn't doing so well. He's not making so much money in tax, he's starting to pay out a bit more in social security. And he's got a few extras - foot and mouth and the war - to consider."

Striking a balance

So what will the Chancellor do?

Taxes could be increased.

National Insurance rates may also go up.

Stamp duty on expensive houses might increase.

And more green taxes might be introduced.

In return there may be a cut in stamp duty on share dealing and there may be tax breaks for industries affected by the war, such as tourism and airlines.

A further expansion of the New Deal programme to help the long-term unemployed and a new tax credit to encourage big business to be more innovative could also be on the cards.

And will there be a crumb of comfort for small business?

John Whiting suggests there may be some small measures aimed directly at helping them.

Student Guide

Gordon Brown, the Chancellor of the Exchequer, has to make some tough choices in November.

He must lay down the plans for his Budget in the spring.

There is a long list of things he must take into account. The items on the list are all subject to change so it's not an easy task.

He is trying to do several things at once:

To make the most of the money that he has to spend

To meet the priorities of the government

To control the economy

What is happening to the economy?

The Treasury, the government department responsible for organising finances, has access to mountains of information about the state of economy.

Some of the things that matter are:

Are more people unemployed?

What's happening to prices?

Are people spending more or less?

Are we borrowing more or less?

Are other countries buying UK products?

Are we buying other countries' products?

This information is used to find out what state the economy is in.

It affects the government's plans in all sorts of ways.

Unemployment

If unemployment is rising fewer people will be paying taxes and more people will need unemployment and other benefits.

The government will receive less in tax and have to spend more.

Where will the money come from?

Prices

If prices are rising fast, the economy will be experiencing inflation.

Our products will be more expensive abroad. This means we may not be able to sell as much so the number of jobs might fall.

How can the government control inflation?

Spending

If people stop spending money then sales and profits will fall. This can lead to job cuts.

If companies stop spending (investing in their own businesses) then that can mean reduced production and also have knock-on effects for businesses that supply them.

This can lead to even more job losses.

How can the government control spending?

Borrowing

When people buy houses or use their credit card they take out loans.

This can mean borrowing rises at the same time as demand for products forces prices up.

What can the government do?

Just think...

Find out what is happening to economy at the moment.

The finance section of BBC Online will help you.

What will happen to the economy?

The Treasury runs an enormous computer programme that simulates the economy.

It feeds in all this information to decide what will happen next?

To look at the future, it will feed in all sorts of "what-if?" questions.

What if life gets worse in the telecommunications sector?

Will there be job losses?

What if oil supplies are cut? Prices will rise.

Just think...

What other questions might the Treasury want to ask its programme?

Safety margin

The Chancellor has to leave a safety margin in case of emergencies.

Who would have guessed that foot and mouth would break out or that the World Trade Center would be destroyed?

All these changes upset last year's plans and affect how much he has to spend this year.

Spending money

The Chancellor has to make choices because there is never enough to meet everyone's desires.

Needless to say, few people get everything they want. The programme showed how the money was divided up in the last Budget.

Just think...

How would you spend the money?

Make a list of your priorities.

Explain why you have cut or increased spending on different areas.

What effect will your changes have?

Getting money

The Chancellor can only spend the money he has, so he will have to pay just as much attention to where the money is coming from as to where it is going.

The government collects money through tax.

Income tax is paid by everyone who works. It is a progressive tax because people who earn more, pay more.

Value added tax (VAT) is paid whenever you buy goods or a service.

It is called a regressive tax because you pay the same however much you earn.

Excise duties are paid on alcoholic drinks, cigarettes and petrol, among other things.

They increase the price to persuade us not to buy things that aren't very good for us. For this reason they are sometimes called sin-taxes.

Corporation tax is paid by all companies that make a profit.

National Insurance was originally set up to pay for health and pensions, but it now just goes into the kitty with the rest of the taxes.

If the Chancellor wants to spend more to give the economy a boost he can also borrow money - but don't forget, it has to be paid back with interest.

Whatever he decides, the aim still has to be:

To make the most of the money that he has to spend

To meet the priorities of the government

To control the economy

A taxing activity

Planning next year's finances is one big balancing act.

It is difficult because the information available is not perfect and to add confusion the government will be juggling its financial goals with its political hopes.

What happens this year will influence the workings of the economy for several years to come, and the government's chances of being re-elected.


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