NAO revises forecasts

A study of the Treasury's economic forecasts, due to be published in advance of the Budget, is expected to show public borrowing several billion pounds a year higher than predicted in last November's Budget.

The report is likely to recommend two changes to the forecast for growth and the public finances, both of which would push up the expected level of government borrowing.

The unprecedented public audit was announced nearly two weeks ago. Treasury sources said the comptroller and auditor general, Sir John Bourne, had been asked to look at a number of "rosy" assumptions made by the former chancellor, Kenneth Clarke.

One of the likely changes is a reduction in the estimate for the economy's long-term growth potential from 2.5 to 2.25 per cent a year. This would reverse the quarter-point increase in potential growth introduced into the forecast last year.

The other is a reduction in the estimated savings from the "spend to save" crackdown on tax evasion and social security fraud announced last November. The last Budget Red Book predicted savings of pounds 6.7bn over three years for expenditure of only pounds 800m.

A National Audit Office report in January implied that savings from the tax crackdown would be lower than assumed.

The changed growth assumption would increase the borrowing requirement by about pounds 5bn after four years, equivalent to 3p on the basic rate of income tax, because of lower tax revenues and higher government expenditure, according to Martin Weale, director of the National Institute of Economic and Social Research.

David Walton, a senior economist at investment bank Goldman Sachs, said: "I think the purpose of this audit is to get a more pessimistic forecast for the PSBR." It would help dampen any pressure from the Government backbenches for increased public expenditure, he argued. "If it turns out to be too pessimistic, it would in a sense have hidden some of the tax revenue for a couple of years," he said.

Most economists think the decision to opt for an audit by the NAO, which has no expertise in economic forecasting, is a device to validate changes in the predictions the new Treasury team wants to make anyway.

Some would even argue that 2.5 per cent is too low as a forecast for the economy's long- term growth. Sir Alan Budd, the Treasury's chief economic adviser, is said to believe the UK's potential growth has increased to more like 3 per cent, mainly because of favourable trends in the age structure of the population.

The date for the Budget is also expected to be announced today. Speculation is now centred on 2 or 3 July.

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