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Brown `can afford election tax cut to 20p'

GORDON BROWN can afford to cut the basic rate of income tax to 20p, according to a report out today. The Government's finances are in good enough shape for the Chancellor to reduce tax by another 2p in time for the election, following the surprise 1p cut in the Budget earlier this month, it says.

Separately, consumer confidence had risen for the third month running even before the tax-cutting Budget, according to the monthly survey by GfK. For the first time since June there were more optimists than pessimists, with a positive balance of 1 per cent.

"The improvement in sentiment ... should not be seen as post-income tax cut euphoria, rather part of a gradual but steady improvement in consumer confidence," according to the survey.

It found 41 per cent of high income households (with more than pounds 25,000 a year) reported an improvement in their finances. On the other hand, only 7 per cent of the lowest income group (pounds 7,000 or less) said the same, and 37 per cent had seen their personal finances deteriorate.

Today's report from the Centre for Economics and Business Research, a consultancy, argues that recent growth in tax revenues and three years of tough public spending control have put the public sector's finances in a strong starting position. In addition, it says revenues will stay buoyant because the official predictions take no account of the fact that GDP figures under-record the economy's actual rate of growth. It estimates that construction, the output of intangibles such as software and the "underground" economy are understated.

Taking account of these raises the level of GDP by 3.2 per cent. As they are expanding rapidly, they will also boost growth by more than official figures are likely to show. The CEBR is predicting 0.7 per cent growth of measured GDP in 1999, but 1.4 per cent actual growth.

This compares with the Treasury's forecast of a 1-1.5 per cent rise in (measured) GDP this year.

Douglas McWilliams, chief executive of the CEBR, said: "The economic prospects for the UK are fairly rosy."

He added: "Because of this and the improved trend in public finances, the Chancellor looks as if he will have the money to announce cuts in taxes in both the 2000 and 2001 Budgets. A Spring 2001 election could be on the cards."

Income tax cuts would leave the Chancellor able to meet both his fiscal rules, Mr McWilliams said. These say that the Government's current spending should balance over the cycle, and that the ratio of government debt to national income must be sustainable.

However, the favourable outlook for the UK depends on the US economy gliding in to a soft landing.