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Lamont hints at public spending cuts: Interest rates could rise to keep inflation low

THE CHANCELLOR yesterday dropped a hint of new cuts in public spending in the November Budget to help to prolong the emerging economic recovery.

Norman Lamont also suggested that the next move in interest rates would be upwards if the upturn began to threaten a rise in inflation pressures. He said this year's pounds 50bn public sector borrowing requirement was the 'biggest threat' to a sustained economic expansion that had yet to be secured.

Responding to the latest IMF analysis of the UK economy, which urges a further tightening of fiscal policy starting perhaps this year, Mr Lamont said: 'We will do whatever is necessary in order to get back towards a better situation. We have got to address this problem.'

Curbing the deficit was not only a goal in its own right 'but a reduction in borrowing is also vital if the recovery is to be sustained', he told the IMF's policy-making committee.

At the very least, the Chancellor said he would hold public spending within the ceilings for the next three fiscal years. Public spending is set to rise by 0.7 per cent in real terms to pounds 253.6bn in the year starting next April.

Mr Lamont's warning on public expenditure was coupled with a confident assessment of the recovery, which he said was now taking place across a broad front. Much of it was ignited by interest rate cuts made before Britain left the European exchange rate mechanism and the full impact of cuts made since was still to be felt.

However, the Chancellor said that if the expansion placed the Government's 1-4 per cent target for underlying inflation in jeopardy interest rates could rise.

'Containment of inflation is the keystone of our policy,' he declared. 'Whatever is necessary to keep inflation down, we will make the policy adjustments to get it.'

The Chancellor said some sectors of the economy began recovering in mid-1992 and recovery was under way in manufacturing, on the high street and in the record exports to European markets.

But he expressed caution over whether unemployment had peaked, though he did say he was confident in a firm improvement in the UK labour market. 'Clearly there can be no sense of satisfaction until unemployment is brought down significantly from current high levels,' he said.

The Chancellor called again for further cuts in German rates to help the European economy, which he acknowledged was vital to Britain's export performance.

His comments coincided with a new report by the leading industrial countries which effectively freed the foreign exchange markets from blame for the European currency crisis of last September.

Instead, it placed responsibility on the divergence of economic policies in Britain and Germany, a condition Mr Lamont said remained true today.

In a report commissioned last September and issued yesterday, the so- called Group of Ten said: 'Despite the surge in volume and the one-way nature of much of the trading, foreign exchange markets generally functioned well throughout the summer and autumn of 1992.'

The report in effect acknowledges that Britain and Italy were maintaining exchange rates that were incompatible with the state of their economies when sterling and the lira were forced out of the ERM.

It also implied that Britain's unwillingness to raise rates last summer helped to foment the currency crisis.