Economic growth saved by surge in public spending

A record surge in government spending offset a sharp slump in private sector activity to deliver an acceleration in overall economic growth, official figures showed yesterday.

The Office for National Statistics revised its estimate of economic growth last year to 1.8 per cent from 1.6 per cent, adding that the economy has grown faster than first thought in every quarter since the start of 2001.

In a triple dose of good news for the Chancellor, Gordon Brown, the ONS also cut the size of the public deficit while a member of the Bank of England's Monetary Policy Committee opened the door to a rate cut that could come as soon as the day after the Budget.

Spending by government departments rose 3.8 per cent last year, the ONS said. This was more than double the rate of the whole economy and the fastest rate since 1975.

It offset the weakest output from the services sector since 1992, the deepest manufacturing recession since 1991 and the biggest drop in exports since 1975.

Meanwhile, public sector investment surged 15.4 per cent, at the fastest rate for 12 years, compared with the 8 per cent slump in business investment that was the worst on record.

Michael Saunders, an economist at Citigroup, said: "There is a fairly widespread tendency to talk as if the economy is unusually weak at present. But while some sectors are weak, supportive monetary and fiscal policies have ensured that GDP growth in 2002 was similar to the norm of a low-inflation world."

The revisions also contained a little-noticed cut to the size of the public sector deficit, ironically because of an overestimate of the volume of government investment.

The effect was to cut cumulative public debt for the fiscal year to February to £16.9bn from a figure published last week of £18.1bn. With an expected further £3bn shortfall in March, the final month of the fiscal year, the revision will allow Mr Brown to claim in his 9 April Budget that he has hit his forecast of a £20bn deficit.

The financial markets brushed aside the figures to focus on remarks by Marian Bell, one of the four non-Bank officials on the MPC.

She told Reuters news agency: "In my view, above target inflation in the near term does not present a barrier to cutting further.

"There clearly would be room to reduce rates further if it was judged necessary to keep inflation in line with target in the medium term."

Her comments will fuel speculation that she will argue for a rate cut at the MPC's next meeting on 10 April.

Alan Castle, a UK economist at Lehman Brothers, said: "Her comments will be taken as a signal that the growth outlook is once against crucial. A rate cut is more likely than not in May."