Britain is already in recession, with national output probably declining this quarter, says a report published today, as Treasury officials finalise the forecasts to be published in the 9 March Budget. They will be less optimistic about growth in 1999, although probably more upbeat about next year.
The Treasury will also publish new research showing that tax revenues and Government spending are just as sensitive to the business cycle as ever. The danger of a plunge into deficit during a slowdown has not diminished, making a stable economy key to Gordon Brown's ability to meet his fiscal rules.
The latest caution about the outlook for this year comes at the start of a crucial week of figures that should give a clearer idea of how severe the economic downturn is likely to be. Good news on last month's retail sales, due Thursday, and unemployment, due on Wednesday, will be needed to offset the alarm triggered by extremely weak figures for manufacturing output last week.
In addition public sector borrowing figures for January, to be published today, will reveal how good a base next year's finances will start from. City analysts expect the surplus for 1998/99 to beat the latest Government target by anything between pounds 2bn and pounds 10bn.
In addition, the latest retail price figures and minutes of the last monthly meeting of the Monetary Policy Committee, at which it cut interest rates by an unexpected 0.5 per cent, will be scrutinised for clues about further rate cuts. Today's joint report from the London Business School and Oxford Economic Forecasting says the MPC has been too timid.
It says: "Even at 5 per cent, the low point in UK interest rates would still be around the level at which US rates recently peaked."
The recession will nevertheless be very mild thanks to the fact that interest rates have fallen faster and earlier than in previous economic cycles. Even so, unemployment will climb to 1.6 million on the claimant count measure by the end of this year, and 1.8 million by late 2000.
GDP in 1999 as a whole will be 0.4 per cent higher than last year, the London Business School report predicts. The downgrade of its forecast for growth means the economists also now expect Gordon Brown to breach his "Golden Rule" that Government borrowing should not exceed its investment spending.
Higher spending on benefits and lower tax revenues mean this year's surplus will turn to "sizeable" deficits in the next two years.
The report says: "Our forecast suggests that, as long as the recession is shallow and short-lived, the Government should be able to muddle through these fiscal challenges without having to raise taxes."
However, it also says that tax increases would be needed to keep Government borrowing on a "prudent" path if there is a more typical downturn.
The report adds that there is no scope for the Chancellor to use fiscal policy to boost the economy. Lower interest rates are needed to keep the recession shallow.