The chancellor's gamble on growth to finance a transfusion for the health service may be at risk from events on Wall Street

The headline judgment on Gordon Brown's Budget must be that it is highly conservative, both in its fiscal arithmetic and overall concept. This is not to deny that the chancellor has been a radical reformer. But most of his reforms had already been set in train, and the changes announced this week were a combination of detailed adjustments and an allocation of the benefits of economic success in a way that might be expected from a prudent Labour government.

Some City analysts have been too quick to convict the chancellor of fiscal laxity. Before he got to his feet on Tuesday the fiscal outlook was already a good deal tighter than his own and other people's earlier estimates had envisaged. His projections still suggest some tightening compared with his 1999 Budget estimates. They represent some loosening only in comparison with locking in the position where he appeared to be.

Moreover, the main loosening is projected for the years after 2001-02. Thus it comes not only after the next conceivable date for the general election, but beyond the two-year horizon at which the Bank of England monetary policy committee looks when fixing interest rates. Even then, he is well within his medium-term fiscal guidelines.

The chancellor has boasted, as he has done in the past, that his projections leave the government within these guidelines, even if economic circumstances turn out less well than his central projections. To which the reply must be "up to a point Lord Copper".

They do indeed show that the current Budget will remain in surplus if economic growth is up to 1 percentage point per annum less than the 2¼-2¾ per cent envisaged in the main projection. This is sufficient to counter any likely disappointment in the behaviour of underlying productivity and also any moderate recession.

It is not sufficient to cover any bigger deterioration due, for example, to a collapse in Wall Street that affected the world economy. The British economy would be especially vulnerable because of its dependence on investment income, profits from financial services, and inward capital flows, which has led one analyst to liken it to a giant hedge fund.

The chancellor decided to omit the discussion of world economic prospects with which his predecessors have bored members of parliament and concentrate on his plans for the British economy in the absence of any major crises or shocks.

A purist might say that, in the event of such shocks, what would matter would be not the actual Budget deficit or net borrowing, but these numbers on a cyclically adjusted basis. Unfortunately, things never quite work out just like that. Not only are the financial markets overly suspicious of cyclical adjustments, but so are most politicians.

If there is a severe recessionary shock, the Treasury is then inclined to make pessimistic adjustments to the underlying movements of both the economy and government spending and revenue. Norman Lamont and Kenneth Clarke found this out in the early 1990s.

By far the most radical moves of Gordon Brown on the tax and spending side have been to increase in-work benefits (greatly enlarging and improving an initiative inherited from a measure of Keith Joseph's in the early 1970s). This has brought with it a redistribution of the national income towards families with children and towards the low-paid. This makes it worthwhile for the chief bread-winner to work for a modest wage rather than to live on the dole. Mr Brown has rightly been prepared to increase the scope of de facto means tests to do so.

The most important document in the Budget package is thus the latest Treasury paper on modernising the tax and benefits system for these purposes. If the Conservatives understood their own economic philosophy, they would cheer him to the point of embarrassment instead of making carping noises.

The one area where the chancellor still seems blinded by dogma is his lack of action in raising the threshold of the 40 per cent higher-rate band of tax. After taking into account indirect taxes, the council tax and other imposts, this amounts to an effective marginal consumption tax of perhaps 55 to 60 per cent. It would take ingenuity to raise this particular threshold without benefiting internet millionaires into the bargain. But it could be done, and there may yet be another Budget for him to remind the middle Englanders who so concern the prime minister that New Labour is about equality of opportunity and not equality of outcome.

Where the chancellor, and even more the prime minister, have clearly been most conservative has been on the two main public services, health and education. The gamble is that if the economy can be kept on a steady path of moderate growth, there will be enough over to throw a good deal of money at education, and even more at health. Ministers hope this will quieten public anxieties about patients on hospital trollies and other similar scares without bringing in any politically incorrect ideas about private finance.

But unless the "new economy" turns out to be as miraculous as Wall Street optimists suppose and the miracle spreads to the UK, these boosts are bound to be on a decreasing scale. The chancellor has been able to top up the allocation for health next year because of a windfall from lower debt interest and lower social security payments, reflecting the fall in unemployment. Neither of these windfalls will continue for ever, and the Treasury's own arithmetic shows the boost to health becoming smaller after 2000-01.

My main fear about the Budget was that there would be too many selective handouts for companies and industries under the banner of "active government" or, sotto voce, "neoclassical endogenous growth". I thus have had ready a quotation from Paul Rohmer, the father of this kind of theory, disowning much of what is done in its name.

"A lot of people see endogenous growth theory as a blanket seal of approval for all of their favourite government interventions, many of which are very wrong-headed . . . the government should be much less involved in infrastructure provision . . . Another wild-eyed notion is that the government should directly subsidise particular research programmes to produce particular kinds of ideas."*

The chancellor steered clear enough from "wild-eyed intervention" to allow me to relegate this quotation to the end of the article, but there were still too many interventionist gimmicks - such as tax breaks on computers for small firms - to omit it altogether.

* Conversations With Leading Economists, B. Snowdon and H.R. Vane, Edward Elgar, 1999.