Clarke hoses down hopes of tax and interest rate cuts

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The Independent Online
Kenneth Clarke, the Chancellor of the Exchequer, yesterday played down hopes of tax cuts in his November Budget and tried to dampen expectations that interest rates would fall soon. He said the present combination of economic circumstances was the best for at least a generation and that the slowdown in the economy was no cause for concern.

His upbeat view ran into immediate trouble with leading business figures. The Confederation of British Industry said there was a greater risk of a further slowdown in the British economy than of inflation creeping higher. Adair Turner, the CBI's new director-general, said that this economic environment meant that the next move in interest rates should be down rather than up.

The key issue for industry was that a rate cut be sustainable when it came. "That is most important for confidence," Mr Turner said after his first CBI council meeting yesterday.

The Chancellor said it was essential to keep inflation down and the public finances on a sound footing. ``Nobody should assume that tax cuts are safely in the bag.''

In an optimistic speech, Mr Clarke said he had intended to slow growth to a more sustainable pace. ``The economy in Britain is still growing and looks set to continue to grow at a respectable pace. This is not a recovery built on sand,'' he said in an address to the Engineering Employers' Federation.

The Chancellor was at pains to stress that there was no policy rift between him and Eddie George, the Governor of the Bank of England. Both agreed on the importance of hitting the inflation target.

Economists in the City saw the speech as a bid to dampen speculation about an imminent fall in base rates as well as massage expectations about tax cuts. ``He wants people expecting next to nothing so they will be pleased when he can deliver something,'' said Ian Shepherdson of HSBC Markets.

The speech, near the end of the public expenditure round, also directed a warning at spending ministers. Mr Clarke said controlling public borrowing remained the top priority. Tax cuts had to be affordable.

Figures released on Monday showed that the Government has borrowed pounds 11.7bn so far this year - pounds 700m more than at the same stage last year. To meet this year's lower target it will either have to raise revenues or cut spending by an extra pounds 2bn a month.

The past two budgets had trimmed pounds 45bn off public spending plans, the Chancellor said. ``Finding further savings on top of these will be difficult but we are certainly striving to find them.'' He had no intention of ``playing fast and loose'' with the public finances.

Economists believe it will be difficult to achieve big expenditure savings. ``It gets more difficult to repeat that trick without root-and-branch reform of public spending,'' said Geoffrey Dicks, chief UK economist at NatWest Markets.

Mr Clarke said voters understood the need for sustainable public finances. "Of course the majority of the public always likes tax cuts but the public only want tax cuts that will last. That means tax cuts that can be afforded when they can be afforded," he said. "There can be no quick fixes when it comes to budgets, be it the Government's budget, business budget, or household budgets."

The Chancellor's speech followed the publication of the minutes of his 27 July monetary meeting with Mr George. These confirmed that the apparent rift earlier in the year had closed.

As in his speech on Monday, Mr George said that without a further rise in base rates the inflation target of 2.5 per cent was unlikely to be hit. But he said the evidence of economic slowdown meant there was a case for waiting for a clearer view of what was happening, despite the risks of delaying too long. Mr Clarke concluded that there was no justification for a change in interest rates that month.

Both men referred to the danger signal of rapid monetary growth, which Mr Clarke said ``might indicate that policy might have to be tightened at some stage.''

``It is very significant that the Chancellor has drawn attention to the rapid money supply growth,'' said David Owen, UK economist at Kleinwort Benson.

Bank of England figures yesterday confirmed that growth of the broad measure of the money supply, M4, increased to 8.6 per cent last month. This takes M4 close to the top of its 3-9 per cent monitoring range. The growth of bank and building society lending has accelerated this year despite sluggish mortgage demand.

Part of the explanation for this pick-up was a big surge in bank borrowing to finance two mergers - of Glaxo with Wellcome and Lloyds Bank with Cheltenham and Gloucester building society. Lending details published by the British Bankers' Association yesterday suggested that the upsurge might be drawing to an end. ``There is no sign of a further upward shift of gear in loan demand,'' said Tim Sweeney, director general.

Simon Briscoe, UK economist at Nikko Europe, said: ``The strength of the M4 data is a good reason not to cut base rates for now, but no reason to raise them now either.''

The disappointing figures sent gilts prices slightly lower, with the market already unsettled by the announcement of a pounds 3bn gilt auction next week.