Brown prepares Cabinet for tough public spending round

Chancellor says he is sticking to his golden rule; Support for near-term rate rise

Gordon Brown will slam the brakes on public spending later this year, he said yesterday as he pledged to stick to his fiscal rules. He also gave a green light to a rise in interest rates that could come as soon as next month.

The Chancellor said the rate of spending growth in this summer's spending review, which will decide departments' spending limits for the three years to 2008, will be lower than the current programme.

"While meeting all our commitments and our fiscal rules, the rate of spending growth in the next spending round will be lower than in this round," Mr Brown said as he launched a Treasury enterprise summit in London.

Spending growth would be held to about 2.5 per cent in real terms, about one-third the pace of the past two years, the Chancellor's advisers said.

The decision, first hinted at during last year's Labour party conference by Ed Balls, the Chancellor's chief economic adviser, came in the wake of calls by the IMF and OECD think-tanks to curb spending to avert a public finance crisis and City forecasts that the Treasury will break its fiscal rules.

However, the Chancellor insisted he would meet his golden rule to balance the budget over the economic cycle. "I am determined not to go down the short-term road," he said. "We will entrench, not relax, our fiscal discipline." He hailed Labour's record on the economy, saying the UK was the only major industrialised economy to avoid a recession during the recent downturn.

Figures last week showed the economy grew at its fastest rate for almost three years over the winter, prompting City economists to forecast unanimously that the Bank of England would raise interest rates to 4 per cent next week.

The Chancellor appeared to sanction the rate rise, saying the Government would support the Bank "in the difficult decisions they have to take".

Oliver Letwin, the shadow chancellor, said slowing the growth of public spending was "not enough", adding: "We need fundamental reform in the way we run public services to give the users far more power and to free the professionals from the rainstorm of targets and bureaucracy."

Mr Brown used the conference to unveil a host of new initiatives aimed at boosting enterprise in Britain and published two joint proposals ­ one with France and Germany and the other with the Netherlands, Ireland and Luxembourg ­ to cut EU regulations and speed up structural reforms.

The four-nation joint paper said reducing red tape could boost EU GDP by 7 per cent and productivity by 3 per cent in the longer term. However, neither document contained deadlines or targets and a Treasury spokesman said they were "statements of principle".

The finance ministers of the Netherlands, Spain, Ireland and Germany all pledged their support for what Hans Eichel of Germany described as "unpopular reforms".

Jean-Claude Trichet, the president of the European Central Bank, used the conference to press the case for British membership of the euro. "A single market that does not yet coincide with a single currency area of 12 countries is a single market that is not yet fully realised," he said.

John Snow, the US Treasury Secretary, speaking on a video link from Washington, said the US economy was "well positioned" for economic growth this year. He reiterated his forecast for growth of at least 4 per cent for 2004.

The Federal Reserve is expected to leave interest rates on hold tonight but the financial markets will be looking for a hint in the accompanying statement of the timing of the first rate hike.

The dollar rose to $1.2527 against the single currency, up 2 cents from Friday's one-week low. The markets seized on reports over the weekend, later denied by the ECB, that M Trichet and Francis Mer, the French Finance Minister, had discussed cutting European interest rates.