Brown urged to slow the boom with tough Budget

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The Independent Online
The Chancellor Gordon Brown's resolve to break the pattern of boom and bust in Britain faces an early test, with fresh evidence yesterday that the economy is expanding at full steam.

The news had experts clamouring for tax increases in next Wednesday's Budget, or higher interest rates - or both - to cool the inflationary pressures.

The national product grew by 3.1 per cent in the year to the first quarter of 1997, compared with 2.9 per cent in the final quarter of last year. High-octane growth in consumer spending accounted for the pick-up.

Separately, the Nationwide building society reported that house prices are growing at the fastest rate since the last boom. Although the biggest gains are still in London and the South-east, the recovery showed signs of spreading. The Nationwide said house prices increased by 1.5 per cent in May, taking annual house price inflation to 11 per cent, compared with 10 per cent in April and less than 9 per cent in March.

Adam Cole, an economist at City of London brokers James Capel, said: "The time has come to halt this boom." He said the economy was showing an "uncanny resemblance" to the late 1980s.

James Barty, of Deutsche Morgan Grenfell, agreed. "Gordon Brown now has the perfect excuse for raising taxes," he said.

But Kenneth Clarke, the former Chancellor, predicted that Mr Brown would be too tough, saying: "It is a mistake to tighten fiscal policy - and put up taxes - when the Bank of England is already free to raise interest rates quite rapidly if it wants to cool the economy."

He said government borrowing was falling fast enough, and his successor simply wanted "an excuse to raise revenue which he will spend in politically- popular ways towards the last years of this Parliament."

Official figures yesterday showed that growth during the past two years has been far stronger than previously estimated, leaving little spare capacity in the economy.

The Office for National Statistics brought ahead its yearly revisions to earlier figures for gross domestic product in time for the Budget.

"Areas adjacent to London are now seeing stronger price rises as the recovery ripples outwards," said Paul Sanderson, Nationwide's head of research.

Yesterday's news made increases in mortgage rates during the summer a racing certainty, the experts reckoned.

"The chances of inflation picking up are high. The Bank of England will now have to be aggressive about raising interest rates," said Michael Dicks, an economist at investment bank Lehman Brothers.

The Bank's Monetary Policy Committee is due to meet the week after the Budget. But it faces a dilemma because the financial markets' betting on the prospect of higher interest rates is driving the pound to uncomfortable heights. Its exchange rate against the German mark reached DM2.89 yesterday, its strongest for five years.

The strong pound is hitting industry's profits. This could hold back future investment spending, which increased by a healthy 3.3 per cent in the first quarter of this year.

Many economists believe Mr Brown should help to ease this policy dilemma by announcing significant tax increases next week. The Chancellor is keen to tilt the balance of the economy away from consumer spending, fuelled by this year's building society share windfalls, and towards investment.