Panel says Clarke has little room for manoeuvre

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The Independent Online
DIANE COYLE

Economics Editor

The Treasury's panel of independent advisers warned Chancellor Kenneth Clarke that he has almost no room for manoeuvre on interest rates or tax cuts this year.

In the first of their two reports this year, the six "wise persons" argue that policy needs to be extremely cautious if the Government wants to hit its inflation target.

"Most of us do not think that the next move in interest rates should necessarily be downwards, and some of us feel that there is already or could soon be a good case for raising interest rates if the Government is serious about achieving its inflation objective," the report, released yesterday, concludes. The exception was Professor Patrick Minford of Liverpool University, taking the minority view that the economy has plent of spare capacity.

Similarly, only Professor Minford argued that there was scope for more than token tax cuts of pounds 2-pounds 3bn in this year's Budget. Indeed, half of the panel's members suggested that either tax increases or further government spending cuts are necessary.

These recommendations are based on the Government's 2.5 per cent target for inflation excluding mortgage interest payments. The independent economists do not think Mr Clarke can achieve both the inflation target and his forecast that GDP will grow by 3 per cent his year. The panel's average forecast for growth is 2.2 per cent, ranging from1.8 to 2.5 per cent. The majority believe, in a subdued echo of the Chancellor's views, that the pace of growth will pick up during the course of the year. Most reckon this will allow unemployment to continue its decline, although not falling below 2 million on the claimant count measure until 1997.

The exception to this is Gavyn Davies of Goldman Sachs, who thinks there could be a temporary rise in the jobless count.

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