Spending weighs against tax cuts

The case against cutting taxes in next week's Budget was strengthened yesterday by official figures showing that higher spending by consumers and the Government are driving the economy's growth.

Although investment fell sharply in the latest quarter, the spread of the recovery to manufacturing was confirmed by an upbeat survey from the Confederation of British Industry.

The buoyant news took the pound another two pfennigs higher to DM2.5326 yesterday. Its exchange rate against a range of other currencies rose 0.8 to 92.8, the highest level for four years, and it also reached a four- year high against the US dollar.

The increase in consumer spending during the third quarter of this year was the biggest for three years, at 1.1 per cent, and the annual growth climbed to a post-recession peak of 3.3 per cent. Rising incomes and lower taxes fuelled the increase.

The other main contribution to the economy's third-quarter expansion was a 1 per cent rise in government expenditure. This was the biggest advance since the quarter immediately before the last general election in May 1992. "This can hardly be coincidental," said John O'Sullivan, an economist at NatWest Markets.

With investment spending dropping by 2.2 per cent, negligible stockbuilding and exports less imports roughly flat, the increase in gross domestic product was 0.8 per cent, as initially estimated.