Majority of advisers urge against tax cuts

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The Independent Online
Five of the Government's six independent economic advisers - the "wise persons" - yesterday attempted to persuade the Chancellor, Kenneth Clarke, not to indulge in a pre-election Budget tax give-away.

All but Professor Patrick Minford of Liverpool University were against substantial tax cuts, and two proposed an immediate fiscal tightening in their pre-Budget advice to Mr Clarke, because of the speed with which the economy is growing.

This contrasts with the widespread view in the City that the Chancellor is preparing to give away pounds 2bn-pounds 3bn in tax cuts to appease anxious backbenchers, probably with 1p off income tax. Some of the panel believe this will happen despite their advice.

The panel's belief that the economy is already growing at a spanking pace and does not need further help was reinforced by the latest purchasing managers' index which rose to an 18-month high in October, the fifth consecutive monthly increase.

The rise from 53.5 in September to 54.5 in October contrasts with subdued indications of manufacturing growth from official statistics. HSBC James Capel said the survey was further justification for this week's rise in interest rates.

Further evidence of a buoyant economy in the run-up to the election came from the Nationwide monthly index of house prices, which rose 0.8 per cent, after seasonal adjustment, between September and October, leaving prices 7.9 per cent higher than a year earlier, the highest annual rate since the recovery began.

A year ago Nationwide said house prices were falling at an annual rate of 3.9 per cent.

Philip Williamson, Nationwide marketing director, said rising prices were "at last being complemented by a stronger trend in house sales". He added that the housing recovery had much further to go.

The report by the Chancellor's independent advisers had little impact on the markets because of the six economists' lack of consensus on the outlook, although they came nearest to agreement on fiscal policy.

In the City some economists claimed after the interest rate cut on Wednesday that the Chancellor was backing the Bank of England's demands for higher interest rates for political reasons, to make it easier to reduce taxes.

Professor Minford called for pounds 4bn in cuts, including 2p off the standard rate of income tax to 22p in the pound. The other five members of the panel recommended varying degrees of tightness in Budget decisions on taxes and public spending.

Kate Barker, of the Confederation of British Industry, said employers wanted tax reductions of at most pounds 1bn and arguably nil. The emphasis should be on cuts in company rather than personal taxes, she added.

Professor Tim Congdon, of Lombard Street Research, called for a combination of tax increases and perhaps public spending cuts to reduce government borrowing.

Martin Weale, of the National Institute of Economic and Social Research, said there was no reason tax increases rather than reductions should lead to a slowdown in economic activity.

On interest rates, which Mr Clarke raised on Wednesday, the panel is divided. While Professor Minford would like to see modest interest rate cuts to ensure that the economic recovery continues, two others argue for higher rates for the Government to meet its inflation target, and the other three say they would not recommend any immediate change.