Chancellor `has little scope for tax cuts'

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The Independent Online

Economics Editor

Chancellor Kenneth Clarke is unlikely to meet his target for growth this year, but has little scope to either reduce the cost of borrowing or cut taxes, according to a report from the Treasury's panel of ``wise persons'' due to be published next Tuesday.

A majority of the six expert advisers predict interest rates might have to be raised later this year or early next, in forecasts which emphasise the political sensitivity of the judgements the Chancellor will have to make.

None of the economists on the panel of independent forecasters thinks the economy will grow by as much as the 3 per cent Mr Clarke predicted in last November's Budget. Professor Patrick Minford of Liverpool University and Gavyn Davies of the American investment bank Goldman Sachs are forecasting growth below 2 per cent.

Yet only Professor Minford believes there is room for more than another quarter point fall in base rates. He thinks the Chancellor should slash 2 percentage points off rates to boost growth to 3 per cent in 1996. There would be no danger of inflationary pressure while there is so much slack in the economy, according to Professor Minford.

He is well known for his view that the Conservatives' labour market reforms have boosted the economy's potential, allowing faster growth without inflation.

That view is not shared by other members of the panel. Mr Davies forecasts inflation slightly above its 2.5 per cent target at the end of this year even with growth as low as 1.9 per cent.

Professor Tim Congdon of Lombard Street Research, the other City member of the panel, has recently sounded warnings about the danger of rising inflation. He thinks the economy will expand faster than its long-run trend rate of growth in the second half of this year and 1997, making inflation of 5 per cent by 1999 a possibility.

The other ``wise persons'' - Kate Barker of the CBI, Bridget Rosewell of consultancy Business Strategies and Martin Weale of the National Institute of Economic and Social Research - predict higher growth. But even Ms Rosewell, the most optimistic, thinks the economy will expand by only 2.7 per cent this year.

Her relative optimism is based on the same argument as Mr Clarke's - the expectation that tax cuts and windfalls such as building society flotations and maturing Tessas will put a tail wind behind consumer spending.

None of the six, apart from Professor Minford, believes that further interest rate cuts will be possible if the Chancellor is to get near his inflation target. The five predict that base rates will start to rise by later this year or early next year.

The panel is, unusually, unanimous about the difficulty Mr Clarke will face if he is hunting for tax cuts in the next Budget. The disappointingly high level of government borrowing means that returning the public finances to the levels set out in last year's budget will limit the scope for tax cuts.

Ms Barker said: ``There is not a good background for major tax cuts that are not matched by additional cuts in public spending.'' Most experts think it will be difficult enough for the Government to stick to the spending limits it has already set.

The panel will publish a report on the amount of spare capacity in the economy in May.