Chancellor cheers doubting MPs

A buoyant Kenneth Clarke is shrugging off tax revenue shortfall, writes Diane Coyle

Kenneth Clarke, Chancellor of the Exchequer, raised hopes of both tax cuts and lower interest rates as he told MPs yesterday that the economy was poised for a strong acceleration in growth without any risk of inflation picking up.

In buoyant mood, he shrugged off the shortfall in tax revenues below the Treasury's earlier forecasts which led him to announce big upward revisions in targets for the Public Sector Borrowing Requirement (PSBR) last week.

"A PSBR forecast that is only out by pounds 4.5bn is not bad by historical standards," he assured the House of Commons Treasury Select Committee yesterday. "The key to policy is that borrowing must be kept firmly on a downward path."

Mr Clarke reaffirmed the commitment to bring the Government budget towards balance in the medium term. But he agreed that lower than expected inflation had created some pounds 3.5bn in slack in current public spending plans.

Reducing the spending target be that amount would be more than enough to cut the basic rate of income tax by a penny, provided there is no further slippage in the PSBR.

Mr Clarke said there was no satisfactory explanation of the shortfall in tax revenues below the Treasury's earlier forecasts. But he added that revenues were growing - just not as quickly as he had expected.

"The forecasts are treated ridiculously. They will be quite different this time next year, I guarantee you a pound to a penny," he said.

The Chancellor defended his optimistic outlook for growth in the second half of this year. In new forecasts last week he predicted it would climb from under 2 per cent in the first half of the year to nearly 4 per cent in the second half. "My confident views are becoming ever more widely shared," he said

However, the Chancellor denied that this view was inconsistent with his decision to cut the level of base rates last month. He said he gave most weight to the direction of the real economy in setting interest rates.

"People are warning me of a risk of overheating in the economy when at the moment we are still at a rather low temperature," he said, in a remark sure to be taken as leaving scope for a further cut in base rates.

Mr Clarke and Eddie George, Governor of the Bank of England, are due to hold their next monetary meeting on 30 July. Mr Clarke said he was surprised the Office for National Statistics had not yet revised up its figures for GDP earlier this year, adding that he had decided not to raise interest rates last May because he had not believed the statistics.

This swipe at the figures follows his recent statement that his Treasury "boffins" had made mistakes and his criticism last week of the Bank of England's inflation forecasts. Mr Clarke added insult to injury: "I did not accuse them of bad forecasts. I simply said their forecasts had always been wrong."