Although the Treasury will revise down its own forecast when it publishes an update in July, the Chancellor will continue to have one of the highest growth predictions for the UK. His current 3 per cent growth target is well out of line with yesterday's 2 per cent prediction from the Organisation for Economic Co-operation and Development.
The shadow chancellor, Gordon Brown, yesterday asked Mr Clarke to justify his optimism about the economy. In a letter to the Chancellor he wrote: "Just as happened last year, it would appear that growth will be lower than you forecast. Under these circumstances, will you either justify your own forecast, or accept the OECD's forecast and spell out the implications for our public finances." If the OECD turns out to be more accurate, tax revenues will be lower than projected in the last budget, further reducing Mr Clarke's scope for tax cuts.
In its review the organisation sounded a note of caution about government borrowing, saying that current public spending plans were "ambitious" and previous attempts to reduce government spending had had mixed results. Future tax cuts should be matched by spending cuts, it said.
However, in its annual report on the British economy the Paris-based think-tank repeated last year's praise of the Government's economic policies for delivering sustainable, non-inflationary growth and lower unemployment. It also reviewed labour market deregulation and competition policy favourably.
The Chancellor welcomed the report's generally favourable assessment of government policies. He noted that the OECD - which is funded by member governments - had revised down its forecasts for most countries and expected the British economy to pick up later this year.
The new forecast cuts the growth outlook for this year from 2.4 per cent previously to 2 per cent, putting the OECD near the gloomy end of the range of forecasts. Its economists have revised up their prediction for growth in consumer spending from 2.3 per cent to 3 per cent but scaled back their expectations for investment and exports. They also expect reductions in excess stock levels to hold back growth.
The current pause is likely to be short-lived, however, as consumer spending will underpin further economic recovery.
The OECD reckons inflation will remain subdued with "a broadly unchanged stance for monetary policy over the coming two years." Its diagnosis that there will be no need to raise interest rates significantly stems from the fact that output remains below potential. It concluded: "The prospects are good for continuing economic expansion and further reductions in unemployment, while maintaining low inflation."
The Government was pleased, too, by the survey's focus on the deregulation of the labour market and stimulation of competition. The OECD has long declared itself impressed by the UK's "flexible" jobs market, but this report was the first to praise competition policy too.
Privatisation had on balance been a success despite concerns about the lack of competition in the utilities, it concluded. The report said there had been "substantial improvements in productivity and impressive real price reductions." However, it had criticisms in both areas. On the jobs front it said the main challenge was to reduce long-term unemployment and upgrade skill levels. It also said the growth in inequality meant "policy-makers may need to bear in mind the position of those at the bottom."
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