Ernst & Young Item Club predict interest rate rises

The Government will have to raise interest rates further next year, but will not have scope for big tax (20) cuts in the 1995 Budget, according to an analysis carried out using the computer model of the economy which (40) Treasury officials use to advise the Chancellor of the Exchequer.

The Ernst & Young Item Club, a group of (60) independent economists who use the Treasury model, predict that economic growth will slow from 3.8 per cent this year (80) to 3.2 per cent in 1995 and tight budgetary policy and rising interest rates slow the pace of recovery. (100) Item predicts that the overall stance of policy will cut spending in the economy by 1 per cent next (120) year, having boosted it by 0.6 per cent in 1994.

Prospects for unemployment meanwhile look better than at any (140) time for five years, according to a survey by Manpower. It found 18 per cent of employers expecting to (160) take on staff in the first quarter, compared to 16 per cent expecting to shed them. Manufacturers are now (180) more optimistic than service sector employers.

The Item report says that to achieve his target of holding underlying inflation (200) below 2.5 per cent by the time the next election is due in early 1997, the Chancellor will have (220) to slow the pace of economic growth to 2.5 per cent a year. "The 1 1/4 per cent increaes in (240) base rates since September will need to be followed by further tightening, of at least the same magnitude, before (260) the economy will slow and interest rates can peak", the report stated.

But inflation is expected to stay low naturally (280) during 1995, as consumers continue to resist paying higher prices in the shops. Companies are expected to find further (300) cost savings by boosting productivity - the amount of output they produce for each person they employ. As long as (320) productivity grows more quickly than wages, companies will find that they having falling labour costs with which to offset (340) higher raw material prices.

The Item Club said that the Government's public spending plans looked too ambitious by assuming (360) that expenditure will only keep pace with inflation up to 1997/8. This means that tax cuts will have to (380) be paid for by increasing the amount the Government has to borrow, which could go down badly in the (400) City.

Item predicts a £6bn tax cut in total, equivalent to 3 pence of the basic rate of income (420) tax and a 1 per cent boost to personal incomes. "This significant contribution to income growth, coming as monetary (440) policy cycle peaks in late 1995 and a fall in unemployment below 2 million, should significantly improve the prospects for (460) consumer spending in 1996". The Government is expected to have to borrow £20bn in 1996/7, rather than the £13bn predicted (480) in the Budget and so on and so forth eco babble kind of thing that makes about 500 words or so (500).

The Government will have to raise interest rates further next year, but will not have scope for big tax (520) cuts in the 1995 Budget, according to an analysis carried out using the computer model of the economy which (540) Treasury officials use to advise the Chancellor of the Exchequer.

The Ernst & Young Item Club, a group of (560) independent economists who use the Treasury model, predict that economic growth will slow from 3.8 per cent this year (580) to 3.2 per cent in 1995 and tight budgetary policy and rising interest rates slow the pace of recovery. (600) Item predicts that the overall stance of policy will cut spending in the economy by 1 per cent next (620) year, having boosted it by 0.6 per cent in 1994.

Prospects for unemployment meanwhile look better than at any (640) time for five years, according to a survey by Manpower. It found 18 per cent of employers expecting to (660) take on staff in the first quarter, compared to 16 per cent expecting to shed them. Manufacturers are now (680) more optimistic than service sector employers.

The Item report says that to achieve his target of holding underlying inflation (700) below 2.5 per cent by the time the next election is due in early 1997, the Chancellor will have (720) to slow the pace of economic growth to 2.5 per cent a year. "The 1 1/4 per cent increaes in (740) base rates since September will need to be followed by further tightening, of at least the same magnitude, before (760) the economy will slow and interest rates can peak", the report stated.

But inflation is expected to stay low naturally (780) during 1995, as consumers continue to resist paying higher prices in the shops. Companies are expected to find further (800) cost savings by boosting productivity - the amount of output they produce for each person they employ. As long as (820) productivity grows more quickly than wages, companies will find that they having falling labour costs with which to offset (840) higher raw material prices.

The Item Club said that the Government's public spending plans looked too ambitious by assuming (860) that expenditure will only keep pace with inflation up to 1997/8. This means that tax cuts will have to (880) be paid for by increasing the amount the Government has to borrow, which could go down badly in the (900) City.

Item predicts a £6bn tax cut in total, equivalent to 3 pence of the basic rate of income (920) tax and a 1 per cent boost to personal incomes. "This significant contribution to income growth, coming as monetary (940) policy cycle peaks in late 1995 and a fall in unemployment below 2 million, should significantly improve the prospects for (960) consumer spending in 1996". The Government is expected to have to borrow £20bn in 1996/7, rather than the £13bn predicted (980) in the Budget and so on and so forth eco babble kind of thing that makes about 500 words or so (1,000).

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