Brown may raise growth forecast

Click to follow

Speculation that the Government is planning to raise its forecasts for the long-term growth potential of the economy, allowing it to justify massive tax cuts, will be fuelled today with the publication of a report into UK productivity.

Speculation that the Government is planning to raise its forecasts for the long-term growth potential of the economy, allowing it to justify massive tax cuts, will be fuelled today with the publication of a report into UK productivity.

Improving productivity is seen in Whitehall as the key to achieving higher long-term growth rates and Gordon Brown, the Chancellor, is keen to make improved productivity the Treasury's key challenge over the next Parliament.

The Treasury has ruled out changing its assumption about the growth potential of the economy before either this week's Pre-Budget Report or the full Budget in March but civil servants are optimistic that a step-change is under way. This could allow the Treasury to review its growth forecasts before a summer General Election.

The current assumption, that the economy can only grow at 2.25 per cent a year without triggering inflation, is used to calculate the public finance forecasts and the amount that the Government can give back to the electorate in terms of higher spending or tax cuts. A change to this would require a reassessment of the productivity of the average British worker, which has only grown by about 2 per cent a year over the last few decades.

A senior Treasury official said today's report would contain clues to the Government's thinking. "There's an interesting question about what is happening to the economy that relates to productivity and the New Economy," he added.

Mr Brown is anxious to see the UK copy the example of the US where heavy investment in information technology and telecoms equipment has helped productivity accelerate to its highest level for almost a quarter of a century.

Today's paper is expected to be an update on progress in the UK but the Treasury official said in terms of trend growth it would be "foolish to publish a running commentary".

Some economists, including members of the Monetary Policy Committee such as DeAnne Julius and Sushil Wadhwani, believe the UK is on the brink of achieving higher rates of productivity.

Roger Bootle, managing director of independent consultants Capital Economics, said recent business investment figures raised the prospect of some improvement on the "dismal" performance of recent years.

Comments