Clarke's rosy forecast leaves taxes on hold

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KENNETH CLARKE yesterday sketched a golden scenario of steady growth and low inflation for the British economy, but warned ministers and Tory backbenchers not to raise their hopes of early tax cuts or any let-up in control of public spending.

'We have quite the best combination of circumstances pointing to sustainable growth and low inflation that I can remember for a very long time', the Chancellor said as he published his first forecast for the economy since the Budget. 'But anybody who thinks I'm going to go in for populism, putting red rings round dates in the calendar when I have got to have tax cuts, is mistaken.'

As reported in the Independent last week, Mr Clarke raised his November forecast of 2.5 per cent growth in national output this year to 2.75 per cent and cut his forecast for underlying inflation at the end of the year from 3.25 to 2.5 per cent. Most City and academic forecasters expect growth to turn out a bit higher still, but are more sceptical about inflation.

The Treasury said tax rises could well depress consumer spending in the short term, but that the effect on recovery would probably be offset by higher exports as growth strengthened overseas.

But the Chancellor was particularly cautious in his forecast of the amount the Government would need to borrow to cover the shortfall between public spending and tax revenue. He cut his prediction of the public sector borrowing requirement for this year by a modest pounds 1.9bn to pounds 36.1bn and for 1995-96 by pounds 2.4bn to pounds 27.9bn.

'The Chancellor has to pretend that times are still tough to keep up the pressure on public spending,' said Simon Briscoe, economist at Warburg Securities.

Ian Shepherdson, at Midland Bank, said the Chancellor would want to avoid creating the impression this year that borrowing would collapse, which would then allow him to cut taxes next year when borrowing did collapse.

But Gordon Brown, Labour's shadow Chancellor, said Mr Clarke would not be able to cut taxes by enough to impress the electorate. He also predicted conflict with the Governor of the Bank of England over base rates.

'It is clear that the Governor of the Bank of England now believes that interest rates and therefore mortgages are going to have to rise. For that to happen so early in the recovery is not good news for the long-term prospects of the economy,' Mr Brown said.

The Chancellor predicted that the economy would grow by 2.75 per cent next year too, surprising City economists who had expected a forecast of 3 per cent or above. They said this might reflect fears that tax increases would do more to dent the recovery than most observers thought. The Chancellor was also relatively pessimistic about job creation over the next 18 months.

However, he was surprisingly upbeat about trade, predicting a pounds 9.5bn current account deficit this year, lower than forecast by all but one of the 'six wise men', the independent forecasters who give him advice on the economy.

City Road, page 29

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