Labour to lose tax cutting weapon ahead of general election

The government will hit its forecasts of above-trend growth this year and next, but will have little room for give-away tax cuts in the run-up to a 2005 general election, an independent economic forecaster said today.

The government will hit its forecasts of above-trend growth this year and next, but will have little room for give-away tax cuts in the run-up to a 2005 general election, an independent economic forecaster said today.

The ITEM Club said the UK would benefit from a combination of a global recovery and continued benign domestic conditions. The UK is on track to record GDP growth of 3.5 per cent this year, with only a small slowdown to 3 per cent in 2005 - putting it within Chancellor Gordon Brown's once-derided forecast range of 3 to 3.5 per cent.

"The economy is surging forward in a run timed perfectly for a May 2005 election," the quarterly report said.

But it warned that the scale of the deficits in the public finances meant Mr Brown might have to admit he had broken his "golden rule" to balance the budget in April as the country prepared to go the polls.

"With a global economy firing on all four cylinders and a UK economy in its best shape since the late 1990s, we can look forward to robust growth over the next two years," the report says. "Although the overall strength of the economy means that any potential shocks to the system can probably be dealt with reasonably comfortably, the scale of the public deficit is an unwelcome inheritance for any of his potential successors."

The ITEM Club analysis shows the Chancellor will break his golden rule - that the Government must not borrow to pay for current spending over the economic cycle - some time next year. "There is a real possibility that he will break the rule next April, which would be hard to deny as the figures come in and the election approached."

The Government has said it believes the current economic cycle that began in 1999 will end in 2006 with a cyclically adjusted surplus of £11bn, which ITEM said gave it little room for manoeuvre.

The ITEM Club had some good news for the Treasury, saying it doubted there would be a crash in house prices.