Brown hits back at Budget criticism

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Gordon Brown yesterday rejected claims that last month's Budget had made it more likely the Bank of England would have to raise interest rates. But his vigorous defence of his policies, the day after an embarrassing rebuke from the International Monetary Fund, came as new business surveys showed the manufacturing sector and northern regions suffering more pain from the strong exchange rate.

The Chancellor, on combative form, claimed a new report from the Treasury Committee vindicated his Budget strategy. The MPs ruled out making the Bank target a particular level for the exchange rate, saying the inflation target allowed the Monetary Policy Committee to take the level of the pound into account in setting interest rates.

However, the report said that while fiscal policy was tighter than forecast, it was becoming more relaxed from this year. This echoed the IMF's comments that the Chancellor's policy was "regrettably" pro-cyclical.

The Treasury Committee's strongest criticism was reserved for the growing lack of transparency in the Budget documents. It recommended several moves to make it easier to monitor fiscal policy, and criticised the Treasury's decision to count the new Working Families Tax Credit as lower revenue rather than higher expenditure.

The MPs' assessment of the fiscal stance was similar to comments by Mervyn King, deputy governor of the Bank of England. In an interview published yesterday, Mr King said the Budget had slightly loosened fiscal policy in the years ahead after the tightening so far, but had not had much impact on the outlook for inflation.

Mr Brown welcomed his remarks, saying: "The strength of our fiscal position has allowed us to lock in our fiscal tightening for the next two years, and is allowing us to invest in our priorities in health and education." He said the cumulative fiscal tightening since 1996/97 amounted to £40bn - nearly 5 per cent of GDP.

Yet business organisations continued to drive home the damage being caused by the strong pound. A survey from the British Chambers of Commerce showed the outlook for manufacturers had worsened in the latest quarter. A separate report from Business Strategies said there were severe skills shortages and pay pressures in the South and East but falling or weak employment growth north of the Humber.