With the government pouring billions of pounds into the war in Iraq, there is even more speculation than usual about what next week's budget will hold. Something's got to give, will it be public building schemes?
The beads on chancellor Gordon Brown's abacus must be searing hot. The uncertainty of the war in Iraq has thrown up financial imponderables that make calculating next week's budget as straightforward as predicting the winner of the Grand National.

The coalition forces may have made swift progress along the banks of the Euphrates, but nobody knows for sure how long it will take to dislodge Saddam and his armies from the streets of Baghdad.

The US realises that the war must end soon if it wants to avoid long-lasting damage to its economy. George Bush will hope that the £48bn already pledged to the war effort will be enough. City experts estimate that the equivalent expense for the UK would be £10bn: so far Brown has said only £3bn would be available.

As well as the expense of the war, Brown has other financial concerns. His growth forecast for 2003 made in November was for 2.5-3%. This now seems hugely optimistic and observers believe 2% is a more realistic figure. Lower growth means lower tax returns. For the current financial year Brown predicted that tax returns would rise by 2.6%, but in the first 11 months revenues have risen by just 0.7%. This leaves Brown with a large hole in his finances that he will be trying to shore up in next Wednesday's budget.

To make up the shortfall Brown can do one of three unpalatable things: borrow more, increase taxes or cut public expenditure. Putting up tax would not be a popular move. Taxpayers are about to be hit with the double whammy of previously announced rises in National Insurance and council tax. As Brown has pledged not to increase income tax in this parliament so it looks as though drinkers and smokers will be coughing once again.

Of real concern to the construction industry is whether Brown will reduce public spending and put the brake on the construction of schools, hospitals, roads and railways. Recent figures from the Office for National Statistics show just how much the UK relies on public sector investment. In the last year it has surged by 15.4%, the fastest rate for 12 years: government departments increased their spending by 3.8% last year, more than double the rate of the whole economy.

This is the reason why the construction industry is enjoying the good times while most other sectors are suffering a boom and bust hangover. The manufacturing recession is the worse since 1991, and the services sector is posting the worse results since 1992. Consumers are also retreating to higher ground: retailers have reported the toughest trading conditions for more than a decade.

Chances are that Brown will leave public investment alone, though, or at least appear to do so. One City expert believes that Brown will only give public building schemes the go-ahead if they meet strict value-for-money criteria, so although the money will continue to flow it won't be at the rate of a torrent.

As increased spending on the public sector is one of the central tenets of New Labour's political agenda, it is unlikely that Brown will suddenly tighten the purse strings. Come budget day Brown is most likely to borrow his way out of trouble. Public borrowing stands at £20bn now, but even if it rose to between £30bn and £35bn borrowing would only be 3% of GDP, which is still less than the US, France and Germany. The chancellor will be less prudent than he would like but he could still claim to be operating within his tight fiscal rules.

So Brown will be out of the woods, then? Not entirely. If the war drags on, consumer confidence continues to fall and the services and manufacturing industries continue to struggle, Brown will simply run out of money to stick to his spending plans. Eventually something may have to give and grand public sector projects may be in the firing line.