Inflation will breach target next year, Clarke's adviser warns

Economy: Optimism on growth means pessimism over prices

An adviser to the Chancellor of the Exchequer warns that inflation will be above the Government's target by the end of next year because of the pick-up in economic growth, in a report published today.

Kenneth Clarke's decision to cut base rates by a quarter point last month has already put him in danger of breaching the target. The move was "not consistent with a reasonable certainty that the target will be met", according to the latest forecast from the National Institute of Economic and Social Research.

The institute, headed by treasury wise person Martin Weale, says there is a one in four chance that inflation will be above 4 per cent by the end of 1997.

Yesterday's meeting between Mr Clarke and Eddie George, Governor of the Bank of England, ended with the apparent decision to leave base rates unchanged at 5.75 per cent. The reduction last month was the fourth since December.

According to the Government's target, inflation should be below 2.5 per cent on average and always within the range of 1 to 4 per cent.

The new forecast is pessimistic about inflation because it shares the Chancellor's optimism about growth with an outlook for next year's growth at the higher end of the scale.

The report says: "Our forecast indicates a substantial acceleration in economic activity in the second half of this year, continuing into next year. This acceleration has been encouraged by the recent reductions in the interest rate."

It predicts that unemployment will fall below two million in the early part of next year as a result of this pick-up in the economy.

Consumer spending is forecast to grow 3.5 per cent next year - less than the Treasury's extremely buoyant prediction of 4.25 per cent but still enough to deliver a growth rate of 3.4 per cent for the economy as a whole.

The national institute economists reckon growth next year will result in a better balance between consumer spending and exports. Improved demand for exports in Britain's main markets will help the manufacturing industry continue its recovery.

The report concludes the main pre-election difficulty for the Government will be the state of its finances.

Although it is less gloomy than the Treasury over the size of the public sector borrowing requirement this financial year and next and predicting shortfalls of pounds 25bn and pounds 24.2bn respectively, the report says it is not feasible to reduce existing public spending plans.

The report argues that the Government will be unable to agree to significant reductions in departmental budgets in a pre-election spending round. Even lower-than-expected inflation will not help it as budgets are set in cash terms and allocated at the beginning of the financial year.

"To produce a budget with unchanged spending plans, larger borrowing and lower taxes will give the Government some presentational problems, but this would not be unprecedented," the report says - noting wryly that this is exactly the situation which came about last year.

The report even denies the Government the fig leaf it has claimed in explanation for the huge overrun in borrowing last year. Recent Treasury forecasts have suggested that the normal links between economic activity and the level of tax revenues had broken down for reasons so far unexplained.

But according to the national institute, "there is little evidence yet that there has been a fundamental change in the relationship between tax revenues and economic activity more generally." The size of the Treasury's forecasting errors is not out of the ordinary, it says.

Start your day with The Independent, sign up for daily news emails
Life and Style
Baroness Lane-Fox warned that large companies such as have become so powerful that governments and regulators are left behind
techTech giants have left governments and regulators behind
News
Keith Fraser says we should give Isis sympathises free flights to join Isis (AFP)
news
Life and Style
'Prison Architect' players decide the fate of inmates
tech
Life and Style
A picture taken on February 11, 2014 at people walking at sunrise on the Trocadero Esplanade, also known as the Parvis des droits de l'homme (Parvis of Human Rights), in front of the Eiffel Tower in Paris.
techGoogle celebrates Paris's iconic landmark, which opened to the public 126 years ago today
News
Cleopatra the tortoise suffers from a painful disease that causes her shell to disintegrate; her new prosthetic one has been custom-made for her using 3D printing technology
newsCleopatra had been suffering from 'pyramiding'
News
people
Arts and Entertainment
Coachella and Lollapalooza festivals have both listed the selfie stick devices as “prohibited items”
music
Sport
Nigel Owens was targeted on Twitter because of his sexuality during the Six Nations finale between England and France earlier this month
rugbyReferee Nigel Owens on coming out, and homophobic Twitter abuse
ebooks
ebooksA special investigation by Andy McSmith
  • Get to the point
Latest stories from i100
Have you tried new the Independent Digital Edition apps?
Independent Dating
and  

By clicking 'Search' you
are agreeing to our
Terms of Use.

iJobs Job Widget
iJobs Money & Business

Ashdown Group: Trainee Consultant - Surrey / South West London

£22000 per annum + pension,bonus,career progression: Ashdown Group: An establi...

Ashdown Group: Trainee Consultant - Surrey/ South West London

£22000 per annum + pension,bonus,career progression: Ashdown Group: An establi...

Recruitment Genius: Client Services Assistant

£18000 - £20000 per annum: Recruitment Genius: A Client Services Assistant is ...

Ashdown Group: Junior Application Support Analyst - Fluent German Speaker

£25000 - £30000 per annum + benefits: Ashdown Group: A global leader operating...

Day In a Page

No postcode? No vote

Floating voters

How living on a houseboat meant I didn't officially 'exist'
Louis Theroux's affable Englishman routine begins to wear thin

By Reason of Insanity

Louis Theroux's affable Englishman routine begins to wear thin
Power dressing is back – but no shoulderpads!

Power dressing is back

But banish all thoughts of Eighties shoulderpads
Spanish stone-age cave paintings 'under threat' after being re-opened to the public

Spanish stone-age cave paintings in Altamira 'under threat'

Caves were re-opened to the public
'I was the bookies’ favourite to be first to leave the Cabinet'

Vince Cable interview

'I was the bookies’ favourite to be first to leave the Cabinet'
Election 2015: How many of the Government's coalition agreement promises have been kept?

Promises, promises

But how many coalition agreement pledges have been kept?
The Gaza fisherman who built his own reef - and was shot dead there by an Israeli gunboat

The death of a Gaza fisherman

He built his own reef, and was fatally shot there by an Israeli gunboat
Saudi Arabia's airstrikes in Yemen are fuelling the Gulf's fire

Saudi airstrikes are fuelling the Gulf's fire

Arab intervention in Yemen risks entrenching Sunni-Shia divide and handing a victory to Isis, says Patrick Cockburn
Zayn Malik's departure from One Direction shows the perils of fame in the age of social media

The only direction Zayn could go

We wince at the anguish of One Direction's fans, but Malik's departure shows the perils of fame in the age of social media
Young Magician of the Year 2015: Meet the schoolgirl from Newcastle who has her heart set on being the competition's first female winner

Spells like teen spirit

A 16-year-old from Newcastle has set her heart on being the first female to win Young Magician of the Year. Jonathan Owen meets her
Jonathan Anderson: If fashion is a cycle, this young man knows just how to ride it

If fashion is a cycle, this young man knows just how to ride it

British designer Jonathan Anderson is putting his stamp on venerable house Loewe
Number plates scheme could provide a licence to offend in the land of the free

Licence to offend in the land of the free

Cash-strapped states have hit on a way of making money out of drivers that may be in collision with the First Amendment, says Rupert Cornwell
From farm to fork: Meet the Cornish fishermen, vegetable-growers and butchers causing a stir in London's top restaurants

From farm to fork in Cornwall

One man is bringing together Cornwall's most accomplished growers, fishermen and butchers with London's best chefs to put the finest, freshest produce on the plates of some of the country’s best restaurants
Robert Parker interview: The world's top wine critic on tasting 10,000 bottles a year, absurd drinking notes and New World wannabes

Robert Parker interview

The world's top wine critic on tasting 10,000 bottles a year, absurd drinking notes and New World wannabes
Don't believe the stereotype - or should you?

Don't believe the stereotype - or should you?

We exaggerate regional traits and turn them into jokes - and those on the receiving end are in on it too, says DJ Taylor