Clarke's advisers seek rate increase

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Five of the Chancellor's six "wise persons" will be calling for higher interest rates, no tax cuts, or both in their pre-Budget report due to be published on Friday. Only one, Professor Patrick Minford of Liverpool University, thinks the economy could grow faster without triggering higher inflation.

In a rare degree of professional consensus, the other members of the Treasury's Panel of Independent Forecasters will argue that Kenneth Clarke should not use next month's Budget to boost growth in the months ahead of the election. Although most expect the Chancellor to find about pounds 2bn for tax cuts - the equivalent to a penny off the basic rate of income tax - one argues that taxes ought to go up.

Martin Weale, director of the National Institute of Economic and Social Research, says: "I would recommend tighter policy. Taxes should be increased because the Government might not stick to the expenditure projections."

In the week of the monthly monetary meeting between Mr Clarke and Eddie George, Governor of the Bank of England, all the experts, apart from Professor Minford, will say that rapid growth means interest rates will have to rise at some point.

Professor Tim Congdon, chief economist at Lombard Street Research in the City, thinks the need is urgent. He argues that Britain is enjoying a "Clarke boomlet" because of the political cycle and recommends leaving interest rate decisions to the Bank of England.

Mr Weale predicts that the Government will not hit its inflation target any time this century because he does not expect the Chancellor to increase interest rates before the election.

The more moderate members of the Panel - Kate Barker of the CBI, Gavyn Davies of Goldman Sachs, and Bridget Rosewell of Business Strategies - do not see the combination of no change in interest rates during the next few months and modest tax cuts as unduly damaging to the economy.

All are forecasting higher growth next year and inflation near the 2.5 per cent target. But they expect the cost of borrowing to rise soon after the election, forecasting the base rate in the 6-7 per cent range.

Professor Minford stands out for his view that there is still plenty of spare capacity in the economy, although he has trimmed the size of the interest rate reduction he would like to see from a full percentage point to half a point.

"We should be looking at the economy as it is, not as someone thinks it might be in two years' time," he says.

He believes that tax cuts announced next month will be around the pounds 2bn mark, but would like to see more: "That is the minimum that is necessary."

A majority of economists outside the Treasury's Panel think interest rates will have to rise right after the election if they do not go up beforehand. In a report published today, Alan Davies, chief economist at Barclays Bank, argues that there is a case for a pre-emptive rise in rates now.

The consensus among analysts in the City is that if Mr Clarke wants to resist increasing interest rates between now and May, he will have to limit the Budget giveaway to about pounds 2-pounds 3bn. It is a repetition of the City's cautious message ahead of last year's modest Budget, although the economic prospects facing the Chancellor are far brighter than they were 12 months ago.