Outlook: New paradigm or sleight of hand?

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The Independent Online
THE ECONOMY seems to be powering ahead faster than anyone could have dared to hope a year ago, which must be bringing a smile even to the austere lips of Gordon Brown, the Chancellor. Having avoided recession, GDP is now growing at 1.2 per cent and appears to be on track for what the Bank of England's Mervyn King calls a "gentle take-off". If the sharp rundown in stocks of goods and raw materials is anything to go by, that could soon turn into a jump jet-style vertical lift-off.

But is the time right for the politicians to cash in on the benefits? According to reports, Mr Brown is toying with the idea of raising the estimate of trend growth from 2.25 per cent to 2.5 per cent or higher. This apparently anodyne tinkering with statistics would allow Tony Blair to sanction an extra few billions of cash for the beleaguered health, education and transport departments, so crucial to an election victory, without apparently damaging the Government's reputation for financial prudence.

Since that money might come on tap for 2000/01 and 2001/02, the timing could hardly be better. The question is how the City, to which Labour pays so much attention, will react. If yesterday's apparently planted press report was a way of testing the waters, then Treasury officials should be pleased with the reaction.

Some analysts believe that there is economic justification for raising the rate of economic growth at which inflation would be triggered, pointing to the increased flexibilities in the economy and especially the labour market. It would also ill become the opposition to complain too much at this sleight of hand, since the Chancellor would only be returning the growth forecast to where it was before he came to power.

On the other hand, things have changed quite a bit since politicians decided for themselves what and what was not a non inflationary growth rate. We now have an independent Bank of England, with a much more realistic view of just what is sustainable and what isn't. In recent history, even 2.5 per cent has been enough to trigger regular bouts of inflation, and 2.75 per cent proved a long way from sustainable.

However, go back a bit further to the late 1950s and 1960s, and such a forecast would have seemed entirely reasonable. So has the Chancellor bought the case for a New Paradigm, or a Goldilocks economy, here in Britain? And will the Bank's Monetary Policy Committee agree with him? We shall see, but if he is right about this, then the stock market is heading higher, notwithstanding worries about the Wall Street "bubble".