`Everything's under control'

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The Independent Online
IN THE backwash of the Budget Barclays Capital global strategist Michael Hughes argues that Gordon Brown is putting the country within hailing distance of the Government's number one policy objective - sustained, non-inflationary growth that nudges up the baseline of prosperity, across the peaks and troughs of the economic cycle.

"Many in the City said the Budget was too loose - that is, too much Government spending and not enough tax collection. But Government finances are as tight now as Geoffrey Howe's Budget of 1981, although perhaps more spread-out," he said.

"The Budgets of July and November put on the squeeze - pounds 5.5bn in new corporate taxes, pounds 1.5bn in new personal taxes. It's always a judgement about how hard to brake the economy. But the brakes are definitely on."

Mr Hughes believes Mr Brown's short-term measures dovetail with two long- term plans: increasing the rate of growth and preparing for EMU. "If by 2001 people can get a 20-year fixed rate mortgage for 7 per cent, Brown will have won," he says. "That's because to achieve that, he will have had to get the Government deficit down to zero."

He predicts a minor pause in the economy this spring, but foresees re- accelerating growth later in the year. "I think consumer spending will come back," he says. "We have the lowest unemployment rate for 30 years. Both the de-mutualisation of building societies and the bull stock market will continue to generate a wealth effect. Another factor is that the Budget did not hit the middle class. Also, people are learning from the US to live with a high level of borrowing."

The Bank of England's interest rate policy and the Government's tax and spending plans will finally bite, he believes. Both gross domestic product and interest rates will decline and the 2.5 per cent inflation target will be met.

The bottom of the downturn will come in 2000. In the process, the percentage of borrowing in the short-term - four times higher than in continental Europe - will decline. This will set the conditions for a less volatile economy which, in turn, will provide the stage for entry into EMU, especially as the French and German economies become more open and competitive, and thus more synchronised with our economy.

Mr Hughes predicts that the economy in 2001 will operate even more efficiently. Greater productivity will bring higher growth rates. Low corporate taxes will bring inward investment from foreign-based multinational companies.

"The Government's welfare-to-work measures will reduce barriers to workers at the low end of the economy taking jobs," he says.

He argues that in the run-up up to the election in 2002 there will be plenty of new jobs. This is because "reduction in national insurance for low-end workers will offset the imposition of a minimum wage".

Mr Hughes adds that as more companies turn to out-sourcing for both cheap and expensive services, this will generate a boom in entrepreneurial activity. Many people quitting large companies in their 40s will begin second careers, taking them past the standard retirement age of 65.

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