Officials dampen hopes of rate cuts
Wednesday 06 December 1995
Alan Budd, the Treasury's chief economic adviser, was asked whether growth of 3 per cent could be achieved next year without a fall in interest rates. Mr Budd replied: "Yes, I do think it is possible."
Another official, Colin Mowl, who heads the forecasting section, said that the Treasury did not expect that a cut in interest rates would be appropriate to "hurry up" the inventory adjustment that is now generally expected. Several City analysts are warning that a sharp temporary burst of destocking will depress growth in the next six months.
Mr Mowl said that the Treasury thought the economy would grow at 0.4 per cent in the last three months of 1995 and then pick up. This forecast of below trend growth in the final quarter took into account an adjustment of inventories. Subsequently, however, the official forecast spreads the effect more generally across next year and into 1997.
Mr Budd said that the Budget was neutral in the sense that the tax cuts were matched by spending reductions. However, the continuing downward path of the budget deficit, from pounds 29bn this year to pounds 22.5bn in 1996/7, meant that "in an underlying sense fiscal policy is being tightened."
In marked contrast to these views, a report by the Ernst & Young Item Club warned that interest rate cuts of 1 to 1.5 per cent appeared to be "the only way the government can meet the budget strategy". Paul Droop, chief economist, said that "recent economic developments have made the target of 3 per cent growth most unlikely. This means interest rate cuts would have to be very large to stimulate the sort of growth Mr Clarke's entire strategy depends on."
Mr Budd said that if the broad measure of the money supply, M4, continued to rise at its present rate of around 9 per cent, there would be "increasing causes for alarm" about the future rate of inflation. However, he added that there was no simple arithmetical relationship between the behaviour of broad money and the outlook for inflation.
The Treasury also cast more light on the drastic downward revision in expected tax revenues next year, from pounds 297bn to pounds 285bn. Tax cuts in the Budget accounted for pounds 3bn, but in addition three taxes were expected to garner much less than had been forecast at the time of the last Budget.
Income tax receipts would be pounds 2bn less (over and above the tax cuts) because the growth of wage and salaries had been less than expected this year. This would knock through to next year.
South Korea ferry: Vice principal rescued from sinking ship found hanged
Missing Malaysia Airlines Flight MH370: Wreckage could be found within a week as search reaches 'very critical juncture', says minister
Royal Tour 2014: Is the Duchess of Cambridge the only person ever to climb into a fighter jet wearing a dress and high heels?
Kim Jong-un, crowds and contraband: Inside North Korea with the Pyongyang marathon winner
Cover up! Mother told to show less cleavage during Disneyland family trip: 'Are we supposed to wear turtlenecks our whole lives?'
The food poverty scandal that shames Britain: Nearly 1m people rely on handouts to eat – and benefit reforms may be to blame
US Navy christens huge $3 billion destroyer ship USS Zumwalt that appears as a fishing boat on enemy radar
Scottish independence: It is the English who should be on their knees, begging the Scots to vote ‘No’
Nigel Farage fatigue? Half of voters ‘immune’ to Ukip’s appeal
Nigel Farage: I’m taking on the status quo, and the Establishment’s fighting back
'Sinful': Video of British Muslims dancing to Pharrell Williams's hit Happy comes under attack
- 1 Pet cat puts three family members in hospital after launching frenzied attack
- 2 Dylan Tombides: West Ham confirm 20-year-old striker has died after battle with cancer
- 3 24 people applied for the 'world's toughest job', here are their interviews
- 4 Angus Steakhouse: How does tourist staple continue to thrive in today's gourmet market?
- 5 Cover up! Mother told to show less cleavage during Disneyland family trip: 'Are we supposed to wear turtlenecks our whole lives?'
iJobs Money & Business
£150.00 per week: QA Apprenticeships: This company has been providing on site ...
£221.25 per week: QA Apprenticeships: This company is a well established Inter...
£40000 - £50000 per annum: Harrington Starr: Client Relationship Manager - SQL...
£35000 - £50000 per annum: Pro-Recruitment Group: Take your chance to join the...