Households will be hit by a double whammy of increases in taxes and interest rates, experts warned yesterday after the government's statisticians admitted to errors in key economic figures stretching back over several years.
In a substantial rewriting of economic history that will anger the Treasury and the Bank of England, economic growth now looks much stronger while the public finances are in a much weaker state. The key revision showed the economy grew twice as fast over the summer as first thought, casting doubt over the Bank's decision to cut rates in July and keep them unchanged since.
The Office for National Statistics said GDP growth in the three months to June was a robust 0.6 per cent rather than the anaemic 0.3 per cent pencilled in in August. The ONS said the upward revision was due to much higher construction output figures supplied by the Department of Trade and Industry.
The revisions, which also raised growth in the first quarter, transformed at a stroke the picture for the first half of 2003 from the weakest for a decade into one of rosy economic health. Although the first estimates were not published until after July's rate cut, the monetary policy committee was clearly influenced by the weak figures when it made its decisions in August and September. Last month the Bank branded the 0.3 per cent figure "implausible", adding: "It was difficult to be at all confident that the current estimates of quarterly growth rates were reliable."
In the City interest rate futures fell sharply as dealers bet the MPC would soon raise rates. Michael Saunders, an economist at Citigroup, said: "It is hard to find good reasons why rates should be lower now than they were at the start of the year. We suspect the MPC is likely to reverse July's precautionary rate cut quite soon." Simon Rubinsohn, the chief economist at City stockbrokers Gerrard, added: "If the MPC had had this information at that point, it would not have sanctioned a further easing in policy."
But others pointed to a "mixed bag" of revisions, which saw cuts to growth of services, consumer and government spending. Jonathan Loynes, the chief economist at Capital Economics, said household spending growth was now at its slowest level in eight years. "This should appease those MPC members who have suggested interest rates might need to rise to contain household borrowing and spending."
The growth revisions will boost the chances that Gordon Brown will hit his forecast for this year of between 2 and 2.5 per cent growth.
However, this was offset by revisions to the public finances, which pushed the deficit in the first months of the financial year to its highest level for more than a decade. The ONS cut the surplus accumulated since the current economic cycle, which began in 1999, by £6.8bn to £22.4bn. The Treasury must balance the budget across the economic cycle but analysts forecast borrowing will rise over the coming quarters. The ONS added £2.9bn to borrowing in the April to June period taking it to £15.4bn, the biggest shortfall since 1993.
Christine Frayne, a senior analyst at the Institute for Fiscal Studies, said: "The fact that this comes at a time when GDP is being revised up means there's more risk the weakness in public finances is down to something structural. The worry is what happens in the next economic cycle as we are saying the [tax] receipts forecast is too optimistic."
John Hawksworth, the head of macroeconomics at accountants PricewaterhouseCoopers who expects tax rises of up to £15bn, said the recent revisions were very significant. "The Treasury will have to beat down very hard on spending if it is to avoid a large overshoot in borrowing this year," he said.Reuse content