It was Brown's 7th pre-Budget report
Gordon Brown has delivered a bullish view of the growing economy - but admitted the UK will have to borrow £10bn more than he had predicted earlier this year.
The chancellor told MPs in his pre-Budget report that Britain would be £37bn in the red this year.
Mr Brown also announced a series of measures aimed at widening childcare provision and hauling more young people out of poverty.
He said the pre-Budget report strengthened "economic stability, enterprise and fairness".
Mr Brown said spending on the war against terror, including military action in Iraq and Afghanistan, would rise by £800m, taking the total spending to £6.3bn - equivalent to about 2p on income tax.
Shadow chancellor Oliver Letwin said government borrowing had soared above Labour's election pledges.
And he accused Mr Brown of spending more money on public services, but failing to introduce reforms, preferring more red tape, targets and taxes.
2003/04: £37bn (up £10bn)
2004/05: £31bn (up £7bn)
2005/06: £30bn (up £7bn)
Figures show Mr Brown's current predictions compared with his forecasts in April 2003
"You are taxing and spending and failing," he said.
Later Mr Letwin told BBC News Online: "I think the chancellor's difficulty is that he dare not do what he should be doing, because he is spending so much money, which is to raise the tax even further ... because he is coming up to an election."
He added: "The alternative we are offering is the fundamental reform of the public services. We want to get some bang for the buck."
Despite the larger than expected borrowing levels Mr Brown told MPs the UK economy was strengthening and would meet his growth forecasts this year.
The chancellor said it was time for the UK to capitalise on a stable and growing economy "to seize the opportunities of the growing world economy".
And he insisted that the government's financial policies meant that the UK's debt burden was still lower than the average for the world's major industrialised nations.
In his Budget last April, Mr Brown had forecast borrowing of £27bn in 2003, a figure which has now risen to £37bn.
He said in April that borrowing in 2004 would be £24bn, but has now revised that sum to £31bn.
But the chancellor said the economy would meet his growth target for 2003, with growth of 2.1% - inside Mr Brown's 2% to 2.5% range.
Mr Brown said his growth targets for 2004 and 2005 - of between 3% and 3.5% - also remained in place.
The chancellor pledged efforts to bring more children out of poverty, with a series of new measures to widen childcare opportunities.
He announced plans to allow employers to offer workers on any income a tax-free £50 a week for childcare, and the creation of 1,000 children's centres for pre-school children and their parents.
He also said he would be increasing the child element of child tax credit by 13%, the equivalent of £3.50 a week
The annual pre-Budget report sees the chancellor updating MPs on the UK economy and his thinking on tax ahead of 2004's Budget.
The chancellor said the government was switching the measure of inflation to the Harmonised Consumer Price Index - used by the EU - replacing the Retail Price Index.
Because of the historically lower level of inflation using the new measure, the Bank of England is being given a new inflation target of 2%, down from 2.5% under RPI.
Mr Brown said the UK economy was in a strong position to capitalise on an upturn in the global economy, and pledged to move forward on a "prudent and sustainable basis".
He put up a staunch defence of the government's "New Deal" programme, which he said had helped two million people to find work.
Mr Brown welcomed reports on the UK mortgage market and housing supply.
He said that on the basis of a report from Kate Barker, a member of the Bank of England's monetary policy committee, he would launch a consultation on ways of encouraging real estate investment trusts.
The Barker report said too few homes are being built, and blames the planning system and the construction industry for the problems.
The second Treasury-sponsored study on mortgages suggested that many UK house buyers are unaware of the benefits to be had from long-term fixed mortgages.
Among other measures announced:
- Plans to give amateur sports clubs tax breaks
- Plans for incentives for using "green" fuels
- £190m to be spent as part of the New Deal on financing time off and
- Mandatory skills courses for the long term unemployed
- The relocation of 20,000 civil service jobs out of London.
A freeze on duties on spirits for the rest of the Parliament coupled with a "stamping" scheme aimed at preventing duty evasion
On council tax, he warned that the government would use its power to cap levels in order to stop unacceptable rises.
Liberal Democrat Treasury spokesman Vince Cable accused Mr Brown of piling more "gimmicks" on an over-complicated tax system.
And Mr Brown had dodged the unfairness of the poorest 20% in Britain paying out 42% of their income in tax when the richest paid just 2% more than that.