Taxes may have to rise, OECD warns Britain

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THE ORGANISATION for Economic Cooperation and Development yesterday suggested the Government may ultimately have to raise taxes or cut spending by some pounds 10bn to halt the steep deterioration in the public finances.

In a gloomy report published yesterday, the authoritative OECD says that Britain still needs to improve education and training. 'Too many students still drop out of school at 16 and often gain no more than basic recognised vocational qualifications'.

The failure of many in this group to gain adequate post- school qualifications for work is partly a result of poor school attainment. The OECD also says that the two-year span of Youth Training may be too short.

The assessment of short-term trends predicts growth of 1.3 per cent this year, rising to a 2.4 per cent expansion rate in 1994.

The OECD said risks of a better or worse outcome were evenly balanced, and warned of a relapse because of the continued high levels of personal debt in the UK.

But the report said 'a more aggressive approach' to cutting interest rates or inadequate efforts to rein in public spending would push up inflation and rapidly derail a recovery. 'Output would be stronger for at most a brief period.'

Even on the most favourable outcome, unemployment would climb to almost 11 per cent of the labour force this year, falling back only slightly in 1994.

The OECD said the sliding pound meant that a rising price level was 'inevitable'. The OECD expects consumer prices - broadly similar to the underlying rise in the retail price index for which there is an official target of 1-4 per cent - would rise by 5.2 per cent this year. But substantial slack in the economy should limit the impact on pay, and inflation should ease back to 4.2 per cent next year.

Published some six weeks before the Budget, the OECD report sidesteps the question of whether the Chancellor should tighten fiscal policy next month, or wait until the December Budget. But it repeatedly refers to Norman Lamont's commitment to address the structural deficit once the economy recovers.

Despite a probable improvement in the balance of trade in volume terms in the next few years, higher import prices due to the falling pound and a run-down in the stock of net foreign assets will deepen the current account deficit by pounds 19bn next year, from a pounds 15.6bn deficit in 1993.

The report, prepared before the latest cut in bank base rates to 6 per cent, said the credibility of anti-inflation policy could be improved by giving the Bank of England a medium-term mandate to achieve low inflation.

On the fiscal front, the OECD said some 30 per cent of the rise in the budget deficit since 1990 - or about pounds 10bn - was due to factors other than recession.