Public spending rises at fastest rate since the Seventies

Government spending surged at its fastest rate for a quarter of a century last year, fuelling economic growth even as the Bank of England was hiking interest rates to dampen down inflation.

General public spending rose 4.4 per cent in 1999, a sharp revision from the previous estimate of 3.4 per cent and making the fastest annual growth since 1975. It included a 1.2 per cent boost in the final three months of the year, revised up from 0.7 per cent. The Office for National Statistics said this was due to higher spending on the National Health Service and by local councils.

This coincided with a period when the Bank of England's Monetary Policy Committee was starting its policy of aggressive monetary tightening to stem what it saw as an inflationary threat from the domestic economy.

The increase in spending fed through to a revision in economic growth for 1999 to 2.1 per cent from 2.0 per cent. Bond yields and sterling both surged on fears that interest rates will have to rise higher than previously thought.

Another factor in the acceleration of GDP growth was household spending, which rose at the fastest rate since the peak of the 1980s boom, the ONS said. A revision in quarterly growth to 1.1 from 0.8 per cent left 1999's growth at 4.5 per cent, the strongest since 1989.

The key driving force was a 10.4 per cent annual growth in spending on durable goods such as "big ticket" items for the home that often characterise a consumer boom.

This was in sharp contrast to a 0.1 per cent contraction in the manufacturing sector in 1999 following a downward revision to growth in the last quarter to 0.4 from 0.7 per cent. This will be seen as a sign of the imbalance between the industrial and consumer sectors of the economy.

Further evidence came from news that Britain's current account deficit with the rest of the word surged to £12.8bn last year, the highest since 1990. This was driven by a ballooning in the deficit in trade in goods to an all-time record high of £26.6bn. This highlights the pressure exporters face from a strong pound, which makes their goods expensive to overseas buyers. The ONS said the deficit on exports in the last quarter sliced 1.2 per cent off GDP.

Michael Saunders, an economist at Salomon Smith Barney, which has stuck to its forecast for a peak in rates at 8 per cent, said the data confirmed his view.