Revised figures pave way for tough Budget

The Chancellor prepared the financial markets for higher taxes and a clampdown on public spending in July's mini-Budget yesterday by changing the assumptions the Treasury uses to make its economic forecasts. On the new basis, the public finances look in worse shape than Ken Clarke, the former Chancellor, predicted in last November's Budget.

Gordon Brown is certain to use the new figures, which were yesterday given a seal of approval by the independent National Audit Office, to paint the previous Conservative government's assumptions as over-optimistic. They are expected to give him ammunition for turning down excessive demands from spending departments and a justification for raising taxes.

Presenting the changed figures and the NAO endorsement as a victory for open government, Mr Brown said: "Budgets must be built on honest foundations. This is the only way to restore public trust in the public finances. This is the first time that any chancellor has opened up the Treasury's forecasting assumptions to such open and independent scrutiny. It means the Budget arithmetic will be based on financial conventions which are open, transparent and accountable."

In a bid to create more openness at the Treasury, Gordon Brown asked the National Audit Office to scrutinise the changed assumptions and say if it considered them reasonable.

Sir John Bourn, head of the NAO, said yesterday: "While the assumptions adopted by the Chancellor are not the only ones which could be reconciled with the evidence, in my opinion they have been arrived at systematically on the basis of the available data and by methods which interpret it in a reasonable way."

The key changes in the assumptions were a revision downwards of the Treasury's long-trend growth forecast from 2.5 per cent to 2.25 per cent and a reduction in the estimated proceeds from Kenneth Clarke's "spend to save" anti-fraud programme.

That initiative predicted savings of pounds 6.7bn could be generated by spending an extra pounds 800m on measures to eliminate errors and fraud from social security claims. By restricting the predicted gains to cash raised immediately from the discovery of an error or fraud, rather than including a figure for indirect effects such as deterrence, the saving is reined back to pounds 4.9bn.

Other changes included a decision not to include future privatisation proceeds in economic forecasts, a measure expected to increase the PSBR by pounds 4.5bn over the next five years, and the use of a flat unemployment assumption, rather than the guess about future trends in the jobless rate that Mr Clarke introduced for the first time last year. That would increase public borrowing by pounds 4.25bn over the five year forecasting period.

The final change will see the Government using market average forecasts for future interest rates rather than an estimate by the Treasury, which might lay the Government open to charges of political interference.

The changed forecasts are retrospective and will be revised again on 2 July to incorporate the changes announced in the mini-Budget.

The change in the long-term GDP growth trend raised eyebrows in the City yesterday, where economists said recent evidence suggested a higher growth rate was sustainable without a threat to inflation.

Economists questioned the relevance of the change, which only takes effect from 1999 onwards. For the next two years, the Treasury uses its actual forecasts for the short-term growth in GDP rather than an estimate of long-term trend growth.

One economist said: "This is largely an exercise in public relations, designed for the consumption of people other than in the City. Everyone knows the plans for three and four years ahead are simply fantasy. They focus on years one and two and those assumptions have hardly changed."

The new basis of calculation puts the PSBR pounds 0.5bn higher in the current fiscal year and pounds 3.25bn higher next year.

Comment, page 23

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