Brown defends 'over optimistic' economic forecasts

The Government yesterday mounted a vigorous defence of its much-criticised forecasts for growth, tax receipts and public finances in the face of mounting evidence that the UK economy is spluttering.

The Treasury insisted its predictions were "cautious" and said there were "significant upside risks" to its projections for the public finances. However its statement, in response to May's critical report by MPs, came as the Confederation of British Industry said manufacturing was mired in a "relentless downturn".

In the Budget, the Treasury forecast growth of 2.75 per cent this year followed by two years of 3.25 per cent growth, well above the long-run trend for the UK economy. It also pencilled in a recovery in the fortunes of City firms, boosting tax revenues and in turn keeping the public deficit below the crucial limit of £30bn or 3 per cent of GDP. These were far more optimistic than was forecast by analysts in the City, where economists expect just 1.8 and 2.3 per cent growth this year and next.

The Treasury said its forecasts were based on a number of cautious assumptions. "These clearly result in a number of significant upside risks to the public finance projections. The various uncertainties affecting the global economy could dissipate more quickly and confidence return more sharply, than anticipated," it said. "This could, in turn, help support a stronger than expected improvement in UK economic prospects and public sector finances."

The economy grew just 0.1 per cent in the first quarter of the year, the slowest for a decade, while the market expected the first estimate for the second quarter on Friday to show only a modest recovery to 0.3 per cent.

Meanwhile a jump in borrowing has raised fears the public finances could plunge £37bn into the red this year - £10bn more than the Budget forecasts. The Treasury insisted: "The Government remains vigilant in the face of these risks and firmly on track to meet its fiscal rules."

Howard Flight, a Conservative Treasury spokesman, accused Gordon Brown, the Chancellor, of "refusing to listen". He said: "He defends his growth forecasts, refuses to commission a review of Treasury forecasting procedures and ignores their concerns about public finances in the next cycle. It's clear Gordon Brown's reputation is living on borrowed time."

In its quarterly survey of manufacturing, the CBI said orders, output and employment all fell further over the spring. Domestic orders have fallen from more than three years while export business has declined for almost seven years.

Total factories orders have fallen or been close to zero for 24 successive quarters or six years, the longest period since its records began 45 years ago.

"The downturn in manufacturing seems to be continuing relentlessly," said Ian McCafferty, the CBI's chief economic adviser. "As far as manufacturers are concerned, the Baghdad bounce seems to be conspicuous by its absence."

He said the Bank of England should be ready to cut rates again if a recovery in the global economy fails to materialise.

"We would look for another cut in the autumn and I can't see any reason why they should not be cut further," he said.