The warning from the National Institute for Economic and Social Research came as Gallup's latest monthly survey of consumers revealed sliding confidence amid growing awareness of the tax rises and fears of rising unemployment.
Gallup found that 37 per cent of consumers expected their financial circumstances to worsen in the coming year, compared with 17 per cent who expected an improvement. This is the most pessimistic response in nearly four years.
The survey also showed greater concern about the economy and less willingness to buy expensive items. Fears of rising unemployment have picked up, despite the survey preceding last month's surprise rise in the jobless total.
The institute predicted that, despite the tax increases, national output would grow by between 2.5 and 3 per cent this year, compared with the Treasury's Budget forecast of 2.5 per cent. But growth is then expected to decelerate as the impact of the weaker pound and lower interest rates subsides, but the impact of tax increases and squeezed public spending persists.
Underlying inflation, excluding mortgage interest payments, is forecast to end the year just under the 4 per cent ceiling of the Government's target range. The institute tentatively predicts little change in 1995, which would probably force a rise in interest rates.
'A sharp cut in interest rates would send the wrong signal about the prospect for inflation if our forecast for the next two years is correct,' the institute warned. It welcomed the latest quarter-point cut.
The institute predicts that the economy will enjoy a medium-term growth rate of 2.25 per cent. Unemployment should level out at 2.5 million. Because this means tax revenue will be lower and spending on social security benefits higher than the Treasury predicts, government borrowing will not fall as quickly as the Treasury predicts. 'In this case it is unlikely that the November Budget will be seen as the Budget that sorted out 'the problem of public borrowing once and for all'.'
Andrew Britton, director of the institute, is one of the Treasury's 'wise men' who give the Chancellor independent advice on the economy. Their latest report will be published today.
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