'Seven wise men' warn of fragile recovery prospects: Tax rises or spending cuts must mean lower interest rates, Chancellor told
'The prospects for recovery remain fragile,' warned the 'seven wise men', appointed last year to provide the Chancellor with independent advice. 'We could well be in for a slow and patchy recovery, as has been the experience in the US over the past two years.'
Evidence that the upturn remained in place - but may have slowed - came with official figures showing that consumers took on slightly less credit in May than in the previous two months and that the amount of cash in the economy was accelerating.
The seven welcomed recent evidence that growth had resumed, but said the recovery would be slow as the downturn elsewhere in Europe hit demand for exports. This was backed up by a Gallup poll showing that confidence among exporters had fallen for a second successive quarter.
On average the seven expect national output to grow 1.5 per cent this year, up from the 1.1 per cent forecast in February and slightly more optimistic than the Treasury's March Budget forecast of 1.25 per cent.
Four of the seven told the Government to do more to cut its borrowing. An extra pounds 6bn- pounds 9bn in tax increases or spending cuts was urged by Tim Congdon, of Lombard Street Research, David Currie (London Business School), Andrew Sentance (Confederation of British Industry) and Gavyn Davies, the Independent's columnist from Goldman Sachs.
Patrick Minford, of Liverpool University, argued that no tightening was needed, while Andrew Britton, of the National Institute for Economic and Social Research, said the measures announced in March were enough. Wynne Godley, of Cambridge University, argued for higher taxes if the trade gap widened too much.
The seven urged that public spending should be concentrated in areas that boosted the economy's competitiveness, including education, transport infrastructure and research and development. Cuts should be focused on public sector running costs. Tax increases should curb consumer spending rather than investment.
All seven agreed that there was no case yet for the Government to apply the brakes to the economy. They said underlying inflation would not breach the top of the 1-4 per cent range 'except on a temporary basis'.
Consumers took on pounds 118m more new credit than they paid off in May, according to the Central Statistical Office. This was less than the increases of nearly pounds 200m in each of the previous two months but left the upward trend since last summer intact.
The fall-back in May came as consumers paid back a net pounds 56m on bank credit cards, the largest repayment for two years. But hire purchase borrowing rose by a net pounds 180m, the most since December 1990.
The Bank of England confirmed that the annual growth rate of the narrow money supply measure M0 - largely cash in circulation - had climbed from 3.3 to 4.4 per cent in June, suggesting that high street spending remains relatively buoyant.
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