City doubts whether Brown can rein in deficit

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The Independent Online

The Government's ambitious boast that it can rein in a ballooning public finance deficit over the next two years has been rejected by the major investment banks.

A survey of City banks showed they expected the deficit to overshoot Gordon Brown's targets by about £14bn over the two years, putting him in danger of breaking his golden rule unless he raises taxes.

Mr Brown said in December's pre-Budget report that he would hit the golden rule - to borrow only to invest over the economic cycle - by 0.2 per cent of GDP or £14bn.

The Chancellor has forecast that public sector net borrowing, which will peak at £37.4bn in the tax year ending next month, will fall to £31bn next year and £30bn the following year.

But the Treasury's monthly survey of City economists showed the average prediction for 2004-05 had worsened to £37bn from £36.1bn in January. Of the 24 banks surveyed only three said Mr Brown would hit or better his forecast. One forecast a shortfall of £47.6bn or 4.5 per cent of GDP.

The average forecast for 2005-06 was for a £37.7bn deficit, compared with a forecast in December's pre-Budget report of £30bn. The gloomiest forecast was for a £53bn deficit with, again, only three banks forecasting a positive outcome.

The City is also sceptical about the Chancellor's forecast for two years of boom conditions in 2004 and 2005, when GDP growth is expected to come in above 3 per cent.

The banks have raised their forecasts for this year to 2.8 from 2.7 per cent but expect a slowdown to 2.6 per cent in 2005. Lehman Brothers, which agrees with this forecast, said the risks were skewed to the downside because of the uncertainty over the housing market.

The City agrees with the Bank of England that inflation will stay below target but rise close to the 2 per cent target by the end of 2005. The average forecast is for base rates to hit 4.75 per cent by the end of the next year.