No it won't hurt, no it won't work

Poor economic results may prompt Kenneth Clarke to fuel a pre- election consumer boom. Yvette Cooper explains why he shouldn't

This was supposed to be the bit that worked, following the bit that hurt last year. With a general election no more than 10 months away, the Conservatives would love a bit of economic optimism.

Instead, on Tuesday in his Summer Economic Forecast, the Chancellor of the Exchequer will have to revise his forecast for economic growth downwards and his forecast for borrowing upwards. But despite the apparent gloom in this week's figures, the long-term risk is the reverse: that Kenneth Clarke will fuel a consumer boom in pursuit of a feelgood factor.

The Organisation for Economic Cooperation and Development expects growth in Britain to be 2.2 per cent this year, rather lower than the Chancellor's cheery Budget prediction of 3 per cent. On government borrowing he was over-optimistic too. His hoped- for pounds 22.5bn Public Sector Borrowing Requirement looks to be more like pounds 27bn.

This won't be the first time that a Chancellor has been forced to admit his earlier forecasts were wrong. Before the 1992 election, Norman Lamont said government borrowing would be pounds 28bn - it turned out to be pounds 37bn.

Such "mistakes" are not confined to pre-election periods. In last summer's economic forecast, the Treasury underestimated borrowing by pounds 9bn. The lesson? Beware Chancellors bearing borrowing forecasts and take Mr Clarke's words on Tuesday with just a pinch of salt.

Few economists believed that the UK economy would grow as fast this year as Mr Clarke hoped. Recession in Europe has squeezed demand for our exports. Manufacturing firms in particular have felt the pinch - output actually fell in the first half of this year, while the rest of the economy was growing.

David Walton, an economist at investment bank Goldman Sachs International, believes manufacturing growth may remain slow for the next few months as companies reduce their stockpiles of goods. And Mr Walton points out that, so far, "companies have made little progress reducing stocks." Goldman Sachs estimates that growth this year will be only 1.9 per cent as a result.

These are the "downside risks" the Bank of England refers to when projecting the future course of inflation: de-stocking and European recession. But these risks don't last forever. Most economists agree with the Chancellor that activity will start picking up later in the year.

The signs are that we consumers are already active. We are certainly borrowing with enthusiasm - on credit cards and through personal loans. Consumer credit is rising by about 14 per cent a year. Consumer spending is already strong and the OECD thinks consumption will grow this year at 3 per cent.

In theory this should be good for Mr Clarke's political fortunes. But will it be good for the rest of us? A consumer-led recovery - rather than an investment-led or export-led one - is not ideal. For Martin Weale of the National Institute for Economic and Social Research (NIESR), it is simply further evidence that "the British economy still suffers from the fundamental problem that we don't save enough."

Growing consumer demand on its own is not the problem. Difficulties arise when supply cannot keep up - exacerbated by low investment and skills shortages. At that point inflation starts to take off: if too much cash is chasing too few goods, prices start to rise.

Most economists appear to agree with the Government that inflation will stay low in the short term. In fact we seem to be on course to meet the Government's inflation target of 2.5 per cent by the end of the year.

But what will happen after that? Stewart Robertson of Lombard Street Research argues that inflationary pressures will start to build towards the end of next year. "We may be storing up trouble for ourselves in the future," he says.

Of course 1997 is slightly beyond Mr Clarke's political time horizon. The trouble is that interest rates - the standard remedy Chancellors use to control inflation - need around two years to take effect. So if you are worried about inflation rising in two years' time, you had better start raising interest rates now.

But Mr Clarke will not want to raise interest rates before an election in anticipation of a problem that voters won't see for two years, especially when he has so little room for manoeuvre on taxes. Lower growth, lower tax revenues and higher spending have all left Mr Clarke with a higher government borrowing requirement than he had hoped for.

Of course, Chancellors have cut taxes and massaged borrowing figures in election campaigns before. Norman Lamont pulled that trick in 1992. However, the City and voters will be more sensitive to such moves this time round.

Irresponsible monetary policy on the other hand is much easier to get away with.

As the NIESR's Martin Weale explains: "If I took the Government's inflation target seriously, I would have put interest rates up by now. What we have seen is the Government hiding behind the lags."

Pursuing the economic feel-good factor rather than going for tax cuts may, however, not pay off politically. In the United States, politicians are finding that voters are no longer prepared to give governments credit for economic recovery. They believe their own hard work and endurance, not government policy, pulled the country out of recession.

If the same thing happens in Britain, a patronising slogan like,"Yes it hurt, yes it worked" may be the last thing a Conservative Chancellor needs.

The forecasts so far

Treasury Average independent

Nov 1995 forecasters May 1996

GDP 1996 3% 2.3%

1997 3% 3.1%

RPI* 1996 2.5% 2.7%

1997 2.25% 2.7%

PSBR 1996/7 pounds 22.5bn pounds 26.2bn

1997/8 pounds 15bn pounds 22.3bn

*Excluding mortgage interest payments

News
people Biographer says cinema’s enduring sex symbol led a secret troubled life
News
newsGlobal index has ranked the quality of life for OAPs - but the UK didn't even make it into the top 10
News
people

Kirstie Allsopp has waded into the female fertility debate again

News
In 2006, Pluto was reclassified as a 'dwarf planet'
scienceBut will it be reinstated?
PROMOTED VIDEO
News
people
News
Researchers say a diet of fatty foods could impede smell abilities
scienceMeasuring the sense may predict a person's lifespan
Sport
footballArsenal 4 Galatasaray 1: Wenger celebrates 18th anniversary in style
News
peopleStella McCartney apologises over controversial Instagram picture
News
Gillian Anderson was paid less than her male co-star David Duchovny for three years while she was in the The X-Files until she protested and was given the same salary
people

Gillian Anderson lays into gender disparity in Hollywood

Life and Style
Laid bare: the Good2Go app ensures people have a chance to make their intentions clear about having sex
techCould Good2Go end disputes about sexual consent - without being a passion-killer?
News
ebooksAn unforgettable anthology of contemporary reportage
Arts and Entertainment
Richard Burr remains the baker to beat on the Great British Bake Off
tvRichard remains the baker to beat as Chetna begins to flake
Life and Style
fashionThe Secret Angels all take home huge sums - but who earns the most?
News
i100
Arts and Entertainment
Amazon has added a cautionary warning to Tom and Jerry cartoons on its streaming service
tv
News
The village was originally named Llansanffraid-ym-Mechain after the Celtic female Saint Brigit, but the name was changed 150 years ago to Llansantffraid – a decision which suggests the incorrect gender of the saint
newsA Welsh town has changed its name - and a prize if you can notice how
Latest stories from i100
Have you tried new the Independent Digital Edition apps?
Independent Dating
and  

By clicking 'Search' you
are agreeing to our
Terms of Use.

iJobs Job Widget
iJobs Money & Business

Trainee Recruitment Consultant - Birmingham - Real Staffing

£18000 - £23000 per annum + Commission: SThree: Real Staffing are currently lo...

Trust Accountant - Kent

NEGOTIABLE: Austen Lloyd: TRUST ACCOUNTANT - KENTIf you are a Chartered Accou...

Graduate Recruitment Consultant - 2013/14 Grads - No Exp Needed

£18000 - £20000 per annum + OTE £30000: SThree: SThree are a global FTSE 250 b...

Law Costs

Highly Competitive Salary: Austen Lloyd: CITY - Law Costs Draftsperson - NICHE...

Day In a Page

Italian couples fake UK divorce scam on an ‘industrial scale’

Welcome to Maidenhead, the divorce capital of... Italy

A look at the the legal tourists who exploited our liberal dissolution rules
Tom and Jerry cartoons now carry a 'racial prejudice' warning on Amazon

Tom and Jerry cartoons now carry a 'racial prejudice' warning on Amazon

The vintage series has often been criticised for racial stereotyping
An app for the amorous: Could Good2Go end disputes about sexual consent - without being a passion-killer?

An app for the amorous

Could Good2Go end disputes about sexual consent - without being a passion-killer?
Llansanffraid is now Llansantffraid. Welsh town changes its name, but can you spot the difference?

Llansanffraid is now Llansantffraid

Welsh town changes its name, but can you spot the difference?
Charlotte Riley: At the peak of her powers

Charlotte Riley: At the peak of her powers

After a few early missteps with Chekhov, her acting career has taken her to Hollywood. Next up is a role in the BBC’s gangster drama ‘Peaky Blinders’
She's having a laugh: Britain's female comedians have never had it so good

She's having a laugh

Britain's female comedians have never had it so good, says stand-up Natalie Haynes
Sistine Chapel to ‘sing’ with new LED lights designed to bring Michelangelo’s masterpiece out of the shadows

Let there be light

Sistine Chapel to ‘sing’ with new LEDs designed to bring Michelangelo’s masterpiece out of the shadows
Great British Bake Off, semi-final, review: Richard remains the baker to beat

Tensions rise in Bake Off's pastry week

Richard remains the baker to beat as Chetna begins to flake
Paris Fashion Week, spring/summer 2015: Time travel fashion at Louis Vuitton in Paris

A look to the future

It's time travel fashion at Louis Vuitton in Paris
The 10 best bedspreads

The 10 best bedspreads

Before you up the tog count on your duvet, add an extra layer and a room-changing piece to your bed this autumn
Arsenal vs Galatasaray: Five things we learnt from the Emirates

Arsenal vs Galatasaray

Five things we learnt from the Gunners' Champions League victory at the Emirates
Stuart Lancaster’s long-term deal makes sense – a rarity for a decision taken by the RFU

Lancaster’s long-term deal makes sense – a rarity for a decision taken by the RFU

This deal gives England a head-start to prepare for 2019 World Cup, says Chris Hewett
Ebola outbreak: The children orphaned by the virus – then rejected by surviving relatives over fear of infection

The children orphaned by Ebola...

... then rejected by surviving relatives over fear of infection
Pride: Are censors pandering to homophobia?

Are censors pandering to homophobia?

US film censors have ruled 'Pride' unfit for under-16s, though it contains no sex or violence
The magic of roundabouts

Lords of the rings

Just who are the Roundabout Appreciation Society?