Bank contradicts Chancellor's forecasts

The Bank of England publicly contradicted the economic forecasts made by the Government yesterday, raising concerns that the Chancellor, Gordon Brown, will have to raise taxes to meet his ambitious spending plans.

Mervyn King, the newly appointed Governor, said that economic growth would fall below Budget forecasts for this year and for 2004 and 2005. The Chancellor is relying on growth of 2 to 2.5 per cent this year, and 3 to 3.5 per cent in the subsequent two years.

Mr King said that the Bank's forecasts were a "very small amount below" the Treasury's lower figure. Its latest forecasts yesterday predicted growth of 1.8 per cent this year, rising to 2.7 per cent in 2004 but slowing in 2005.

The announcement follows a survey last month showing that economists in the City did not believe the Chancellor could reach his targets for economic growth either this year or in 2004.

As a result they are forecasting that public finances will plunge £32bn into the red this year and £34bn in 2004, compared with Budget forecasts of £27bn and £24bn.

Mr King's remarks prompted independent think-tanks to warn that Mr Brown would have to hike taxes by as much as £20bn a year to fill a black hole in public finances.

And Michael Howard, the shadow Chancellor, said: "People who are worried about their jobs and mortgages will be rightly concerned that independent experts are contradicting what the Government says about our nation's economy."

Meanwhile, the Governor tried to play down fears that Britain was on the brink of a debt crisis but said the Bank was closely monitoring current borrowing levels.

Households borrowed almost £10bn in June, the largest monthly figure in modern records. "I don't think any central bank could be complacent with 12 per cent growth in credit," Mr King said. "This is very high and has been high for some time." He also advised people buying homes that it would be a mistake to take out large mortgages on the assumption that their incomes would continue to rise at the pace of the past few years.

"High and rising debt burdens increase the vulnerability of households to adverse shocks - to incomes, for example - and raise the risks of a subsequent sharp correction to house prices and consumer spending," Mr King said. "At this stage, it's difficult to argue that the data has evolved in a way that justifies the worst of the concerns."