Boom! The Tory economy begins to boil

Click to follow
The turbo-charged economy delivered a dramatic fall in the number of people claiming unemployment benefit in February, taking the headline jobless total below 1.75 million for the first time since November 1990.

As John Major, Michael Heseltine, and Kenneth Clarke rammed home their election message, that "Britain is booming", warning signs of higher inflation made an increase in interest rates and mortgage costs after the election a racing certainty in the eyes of the financial markets.

The latest economic indicators will have deepened the rift between the Chancellor of the Exchequer and Eddie George, Governor of the Bank of England, over interest rate policy. Minutes of their meeting last month showed that Mr Clarke turned down flat the Governor's advice to increase borrowing costs straight away.

The politics of the booming economy have been repeatedly exposed by the Prime Minister and his top team this week, in a concerted effort to revive Conservative fortunes. Mr Clarke said on Tuesday: "Today, Britain is booming, without going bust." Yesterday, Mr Heseltine told a Tory election press conference: "Britain is booming; Britain is doing extremely well as the figures clearly reveal."

That was followed by Mr Major, who said during an election campaign visit to Newbury in Berkshire: "Britain is booming, but not in an unreasonable way." He then added: "We must make sure that is not thrown away."

But the Chancellor's run of luck with the figures could be coming to an end.

A fresh batch published yesterday lent weight to the Bank of England's inflation warning, and Bank officials are concerned that the Government has not hit its inflation target at any point since the end of 1994.

The biggest shock yesterday was news of a pick-up in earnings growth to 5 per cent in January from 4 per cent in October - the fastest acceleration for 20 years. No City expert expects Mr Clarke to bite the bullet after his next - and possibly final - monthly meeting with Mr George on 10 April.

"Kenneth Clarke would have to be a saint to raise interest rates next month. He would have to wait for the history books to give him credit," said David Mackie, an economist at investment bank JP Morgan.

But some Opposition sources suspect Mr Clarke might act - to underline his prudence, and show that he will not take risks with the economy. The financial markets firmly expect a rise in the cost of borrowing, which would be passed on to most mortgages, at the meeting straight after the election between the Governor and whoever is then Chancellor.

"Interest rates will go up on 7 May. The only question is by how much," predicted Ciarn Barr, an economist at Deutsche Morgan Grenfell.

The Labour Party challenged yesterday's unemployment figures. The Labour leader, Tony Blair, said: "I don't believe most people think these statistics are a true reflection of the situation because many people are ineligible to claim unemployment benefit but they are still basically unemployed."

Don Foster, the Liberal Democrat spokesman, said: "We all want unemployment to fall - but not just because people have vanished from the unemployment figures to miraculously pop up somewhere else. Creating a black hole for people to fall into is not the same as creating jobs."

Later, Mr Heseltine savagely attacked Labour spokesman Stephen Byers for saying that Britain was the youth unemployment capital of Europe. "Stephen Byers is lying," the Deputy Prime Minister said. "Not even the Europeans believe him."

Although the Office for National Statistics said the introduction of the Jobseeker's Allowance in October had distorted the figures to an unknown extent, it said the downward trend in unemployment had gathered speed. The claimant count is likely to fall below 1.5 million by the end of this year.

The headline unemployment rate declined to 6.2 per cent last month, taking the total below 1.75 million for the first time since November 1990 - when Mr Major replaced Margaret Thatcher as Prime Minister.

Joblessness was down in all regions, especially the South-east. Other figures confirmed that the economy is buoyant. Unfilled vacancies in JobCentres are higher than at the peak of the last boom, with almost a quarter of a million new vacancies posted last month. Employment has risen too, with the strongest gains in the service industries. In addition, high street sales grew far more than expected last month. Earlier surveys had painted a downbeat picture, but official figures showed strong growth in sales volumes almost across the board.

Business, page 20