Economy growth trend rises as Brown prepares for Budget

THE BRITISH economy's trend rate of growth has risen, according to a Treasury paper published this morning on the eve of Gordon Brown's Pre-Budget Report. It estimates that GDP can grow at 2.5 per cent a year on average, rather than the 2.25 per cent assumed previously.

However, the forecasts of the public finances presented in tomorrow's statement by the Chancellor will continue to be based on the lower figure. The spending review next year to set departments' expenditure plans for the following three years, 2001/02 to 2003/04, will also be based on the cautious figure.

The Treasury said a cautious view would be taken for all fiscal planning. "The forecasts will be kept on a prudent basis," he said. Sticking to the cautious 2.25 per cent trend growth assumption for the public finances means the surplus of revenues over spending will be several billion pounds higher than if the 2.5 per cent figure were used.

The fiscal rules require the Chancellor to balance current spending over the course of the business cycle, so a surplus as the economy expands is needed to offset deficits during the downturn.

Business will welcome continued prudence, as any relaxation would put more pressure on interest rates. However, it will give more ammunition to critics who claim Mr Brown is building up a pre-election "war chest".

The Treasury's new, more optimistic assessment of the economy's long- term potential does not depend on assuming there has been any kind of "productivity miracle". Measures to boost productivity will be at thecentre of the Chancellor's statement tomorrow.

Treasury forecasts in the late 1980s fell into the trap of revising trend growth up as high as 3 per cent only to find it was a temporary, cyclical improvement that later went into reverse. Monetary and fiscal policy then had to tighten sharply, having been too set loose on the assumption the economy could sustain higher growth.

Rather, the main reason for today's upward revision is faster growth in the working-age population combined with a higher employment rate amongst that demographic group. Stable growth and lower unemployment thanks to a range of jobs market measures mean the proportion of people of working age who are in work has risen.

The new economic forecasts presented tomorrow will be a range centred around the new 2.5 per cent trend, with the lowest figure used to set tax and spending and the higher figure indicating the potential for improvement.

Treasury economists hold out the hope of future upward revisions to the trend growth rate if evidence of a permanent improvement in productivity does emerge. Even a small improvement in productivity compounds into a big change in living standards after a number of years.

During the past 20 years productivity - GDP per worker - has grown on average by just under 2 per cent a year. The paper lists a number of reasons for hoping this might improve, including new incentives for investment and enterprise announced in previous Budgets and the possibility that technological change will boost growth.

News Analysis, page 16