LIKE the war in Iraq, which stole most of this morning’s headlines from the “bad news Budget”, Gordon Brown’s battle with economic troubles turned out to be more of a cakewalk than the quagmire that was widely predicted by armchair chancellors in the City and the press.

During the past few months, as the Chancellor patiently marshalled his divisions of documents and squadrons of statistics, many observers believed that he faced the toughest battle of his political life. Not only did he have to cope with the economic consequences of the war itself. All around him were shadowy enemies more alarming than the Iraqi tanks — errors in the Treasury forecasts, black holes in the public finances, pressures to raise taxes, demands for a decision on the euro and talk of recession in Britain and around the world. But in the event, these potential enemies seemed to melt away as mysteriously as the Republican Guard and the Fedayin.

Let us begin with the war’s direct effects. With the cost of the war now estimated at £3 billion, the Chancellor simply added £2 billion to last year’s public spending, on top of the contingency sum of £1 billion he allocated in November to Iraq. Partly as a result of this increase, public- sector net borrowing (PSNB) for 2002-03 is now estimated at £24 billion, instead of the £20 billion forecast last November. Thus the £2 billion of extra spending on the war accounted for half the deterioration in last year’s public finances, with the other £2 billion attributed mostly to the errors in the Treasury’s forecasts.

Assuming that the period of intense fighting really is largely over, there should be no further direct budgetary effects from Iraq. The cost of the war will simply be added to public debt, with no long-term impact tax or public spending. This is a perfectly sensible approach to the financing of a one-off event such as war and it should be the end of the tedious questions about “how do we pay for the war”. The cost of the war will simply be equal to the interest payable on £3 billion of extra public debt — roughly £150 million a year, or 10p a week per taxpaying household.

A much more important threat to the Chancellor’s fiscal dispositions was the war’s indirect impact. The sharp increase in oil prices and the collapse in consumer and business sentiment before the war raised the very real threat of a global recession, which would have blown all the Treasury’s calculations to smithereens.

Mr Brown’s financial strategy — and, with it, the credibility of the entire new Labour project — depends critically on the British economy’s ability to generate enough tax revenues to fund an unprecedented bonanza of public spending.

In last year’s Budget, Mr Brown forecast a growth rate of 2 to 2.5 per cent. The outcome, at 1.8 per cent, was only a little below the lower bound of this range, yet the 2002-03 borrowing figure of £24 billion was almost double the Treasury’s original expectation, even ignoring the £3 billion of unplanned spending on the war.

Yesterday Mr Brown again put economic growth for the year ahead at 2 to 2.5 per cent. If the economy should again suffer a growth shortfall, the inevitable consequence will be a public deficit much higher than the £27 billion he predicted for 2003-04. What is worse, the deficit numbers for future years, which are currently expected to decline slightly in 2004-05 and then settle in a comfortable range just above £20 billion, would continue to mushroom, as far ahead as the eye could see. The critical question about this Budget, therefore, is whether the Treasury’s growth forecasts can be believed. The Tories certainly think that forecasting credibility is the Chancellor’s most vulnerable point. That was what Iain Duncan Smith concentrated on yesterday, taunting Mr Brown for “getting his sums wrong”.

Until a few days ago the Treasury was genuinely worried about this line of attack, because of the economic uncertainty created by the war. But if the situation in Iraq settles down, the Treasury’s forecast of 2 to 2.5 per cent growth in 2003 will become perfectly plausible, as will the even more ambitious forecast of 3 to 3.5 per cent growth in 2004.

Mr Brown’s critics accuse him of overoptimism on the grounds that growth has disappointed expectations for the past two years, averaging just under 2 per cent. Surely, they say, it is imprudent to assume a signifcantly higher growth rate in the years ahead.

But this misses the essentially cyclical nature of any capitalist economy. If we believe that the British economy’s long-term trend growth rate is 2.5 per cent (as most economists do) or even just 2.25 per cent, which is the more cautious assumption used by the Treasury in its long-term forecasts for public finances, then a period of below-trend growth such as the one of the past three years must by definition be followed by a period of growth well above the trend.

Unless we believe that the British economy’s performance has permanently deteriorated in the past five years — which seems implausble given its consistent outperformance in relation to the other economies of Europe — the Chancellor is quite right to assume a period of relatively rapid growth in the next few years.

But while faster growth is certainly possible, the question is whether it is likely. That, in turn, will depend mainly on two factors: if the world economy manages to avoid another recession, and if last year’s boom in consumption and housing settles into a period of of steady growth instead of collapsing into a bust.

Mr Brown can have very little influence on either factor, but they are not entirely outside his control. The best he can do to avoid a global recession is to set an example to other finance ministers by ignoring the demands from the European Commission for further tax increases and budgetary strictures.

As for the situation in Britain, Mr Brown can try to reassure consumers that they will suffer no further tax raids in the foreseeable future — and that moderately rising house prices should be seen as a useful support for the economy, rather than an inflationary threat. He could also try to persuade the Bank of England that Britain’s sustainable growth rate really is well above 2 per cent. At a time of very low inflation, monetary policy should aim to push the economy back up to its long-term trend.

I suspect the Bank of England may already share this conviction. It should also welcome some of the Budget’s supply-side measures: to redirect growth towards the regions, loosen up housing supply and create more work incentives for the unemployed. All these should gradually increase the economy’s long-term potential for non-inflationary growth. That, in turn, should be conducive to further cuts in interest rates — and a decisive victory in the battle which the Chancellor still desperately needs to win against disappointingly slow growth.