Chancellor set to increase growth forecast for 1997

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The Chancellor is believed to have increased his forecast for growth next year in the light of signs that the economy is moving up a gear. A modest upward revision would bring the Treasury more closely into line with other economic forecasters and allow it to lop several billion pounds off the Government's planned borrowing requirement.

The new predictions published with tomorrow's Budget are likely to put the increase in gross domestic product (GDP) in 1997 at 3.5 per cent, compared with 3.25 per cent in the Treasury's mid-summer forecast. It will put the Chancellor in the middle of the range produced by his panel of independent forecasters, the six "wise persons".

However, he will remain more optimistic than most others on inflation. Mr Clarke will have to continue predicting that the Government will meet its inflation target of 2.5 per cent by the end of next year, although he could edge up the forecast from its current 2.25 per cent.

Most experts think the target measure of inflation, the RPI excluding mortgage interest payments, will be closer to 3 per cent a year from now. It stood at 3.3 per cent in the 12 months to October.

Mr Clarke has long insisted that the economy would gather steam in the second half of this year and into next and he has been proved right, not least because of his decisions to reduce interest rates on four occasions between last December and June. Economists in the City and elsewhere have been steadily revising up their own growth forecasts during the past few weeks.

"The Chancellor can certainly justify moving his own forecast up. The evidence is pointing that way," said David Owen, an economist at investment bank Kleinwort Benson.

One advantage of the move is that it will help justify a more optimistic outlook for tax revenues and government borrowing. According to rule of thumb in a Treasury working paper last autumn, an extra quarter point of growth could reduce the borrowing requirement by up to pounds 6bn after two years.

The embarrassment of severely underpredicting tax revenues last year has made Treasury economists more cautious about their forecast for next year. Even so, the combination of a brighter growth outlook and better- than-expected tax receipts so far during 1996 will allow them to significantly reduce the borrowing forecast.