Budget Special: Treasury advisers disagree over need for rate rise

THE BUDGET AND BUSINESS: Verdict of the wise men and women
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The Independent Online
The Government's panel of "wise persons" disagreed sharply last night in their reactions to the Budget. Two thought the Chancellor would immediately be forced to raise interest rates, while a third thought rates should be "cut sharply".

Martin Weale, National Institute for Economic and Social Research, said the Budget was "disappointing. It doesn't put the public finances on a sound basis".

"There hasn't been a genuine fiscal tightening. Mr Clarke could have taken the revenue from the profit-related pay straight into the Budget, instead of putting it off until 1998.

"The PSBR at pounds 19bn is still too high to be sustainable. The total fiscal tightening is only by half a billion pounds. The Chancellor needs to raise interest rates by quarter of 1 per cent sooner rather than later."

Gavyn Davies, chief economist at Goldman Sachs and an unofficial adviser to Labour, said the PSBR was still far too high.

"Given the way the economy is behaving, the PSBR in 1996/7 should have been much lower than pounds 26bn....

"The economy is now embarking on a powerful and dangerous consumer-led boom, much as it did in 1987/88."

Professor Patrick Minford of Liverpool University, who is due to stand aside as a wise person, was as usual on his own in calling for an immediate "sharp cut in interest rates".

While Mr Clarke did "the maximum that the consensus permitted" with "desirable moves to greater neutrality on taxes", Professor Minford complained there was a "cloud overhanging the Budget".

"The green light given to sterling by interest rate policy is a serious danger. To extinguish it Mr Clarke should cut interest rates temporarily, but possibly sharply, as a warning to sterling buyers."

Roger Bootle, chief economist with HSBC, whose slogan in recent years has been "inflation is dead", described the Budget as "prudent but dull." "The big issue is whether it is prudent enough to prevent the Governor of the Bank of England from pressing for another interest rate rise. Mr Clarke's inflation forecast of 3 per cent by the end of the year clearly shows he is optimistic he can get away without another rate rise.

"With a following wind the inflation rate might just get there, but this runs against prevailing pessimism and recent figures."

Kate Barker of the CBI said: "The PSBR number is satisfactory, but it is disappointing that personal tax cuts were funded by raising business costs and not cuts in public spending."

"The balance of the package is tight enough to make another interest rate rise unnecessary. But the Budget does add a little to inflationary pressures because it boosts the private sector."

Bridgette Rosewell of Business Strategies said the Budget was "boring - but the right thing to do".

"The Chancellor can leave interest rates right where they are. His Budget was certainly prudent and cautious, the fiscal tightening was okay."

Tim Congdon of Lombard Street Research was unavailable for comment.