Rarely has the economic backdrop been so favourable for a UK budget as for Gordon Brown's package - to be presented this afternoon.

Despite sterling's startling gains, economic growth is accelerating. Despite rising pay awards, inflationary pressures remain subdued. And despite higher public spending, the public purse is bulging.

Indeed, fiscal surpluses exceeding £10 billion sterling (€16 billion) are indicated for the next two years. These surpluses are around £9 billion better than anticipated a year ago, giving Britain's Chancellor plenty of room for manoeuvre in planning the government's pre-election programme. But while there is scope for a "giveaway" budget, economists diverge on its impact at this stage in the economic cycle.

In retrospect, economic growth and the housing market have benefited from loose fiscal policy, forcing the Bank of England's monetary policy committee (MPC) to tighten policy through interest rate increases of 56 per cent.

Higher interest rates have been a key factor behind sterling's appreciation - which has undermined the international competitiveness of manufacturing industry, as indicated by BMW's decision to unload the Rover Car business.

Against this backdrop, good economics should dictate tightening fiscal policy through tax increases and reduced spending that would achieve a better balance of fiscal and monetary policy and relieve the pressure on sterling.

But good economics do not make good politics as the government prepares its re-election strategy and pressure mounts for a giveaway budget, with tax reductions combined with extra spending on health, education, transport and welfare-to-work programmes.

In the past, Mr Brown has designed his budget to comply with two self-invented fiscal rules for managing the government debt.

Under his "gold rule", the government will borrow only to invest and not finance current spending; under the "sustainable investment rule", the level of net debt will be set at a "stable and prudent" level, currently defined as 40 per cent of GDP.

Although Mr Brown could unwrap a £10 billion giveaway budget without threatening either of these fiscal rules, the need for caution at this re-election time may restrict the net tax cuts and extra spending to around £5 billion.

With members of the Bank of England's MPC worried about the impact of the booming housing market on growth in consumer demand, Mr Brown is expected to increase stamp duty on house buys.

Economists are divided in their opinion on the potential impact of £5 billion net fiscal stimulation at this stage in the economic cycle when growth is accelerating.

Pessimists are concerned that Mr Brown's failure to apply the fiscal brakes will leave the MPC to restrain inflationary pressures and the booming housing market through further interest rate increases.

The influential Centre for Economics and Business Research predicts rates will increase to 6.75 per cent, from 6 per cent, by the end of this year - and to a peak of 7.5 per cent mid-2001 if the housing market has not cooled by then.

If these predictions are realised, sterling will retain its "hard currency" status even if the European Central Bank raises euro rates.

Optimists believe Mr Brown's fiscal stimulation can be easily absorbed by an economy reaping the first benefits of the dot.com revolution.

Enhanced productivity growth has raised the threshold for economic expansion before inflationary pressures become a cause for concern.

So far, Britain's underlying inflation is lower than in any EU member-state and, as such, remains well within government targets. Further, economic activity is beginning to be affected by higher interest rates and sterling's gains.

On this reckoning, the peak in the interest cycle could well be near, possibly after a quarter-point increase to 6.25 per cent, suggesting sterling weakness at a time of recovery in the euro. Recent sterling weakness on the currency markets marks the beginnings of step-change for the British currency, with devaluation being the main threat to Mr Brown's key contribution to the government's re-election strategy.