Disclosure of the IMF recommendations coincided with a 1.6 per cent surge in January's retail sales - the largest since June 1991 - that appeared to bring tentative evidence of a modest pick-up in economic activity. Norman Lamont, the Chancellor, said the figures confirmed confidence was returning to the high street and he ruled out a further interest rate cut for the time being.
A confidential annual review of the UK economy, discussed by the IMF board last Friday, said medium-term prospects for public finances were a source of serious concern. Sources familiar with the board debate confirmed a Reuter report that some directors believe fiscal policy must be tightened soon, to restore the credibility of anti-
It is understood at least one senior board director called on Britain to take action in the Budget on 16 March. Six of the Treasury's 'seven wise men' have urged the Government to delay raising taxes at least until December.
During the IMF discussions David Peretz, Britain's representative at the Fund, told the board that a large part of the UK budget deficit, estimated at more than pounds 44bn in the financial year beginning in April, was due to recession. If, once recovery emerged, it proved that the Government was carrying a sizeable deficit, corrective measures would be taken, Mr Peretz said. He also emphasised that the Government was undertaking a root-and-branch review of public spending.
The IMF conclusions came despite concern at the Washington-based institution that there were few, if any, indications of recovery in the UK.
The steep climb in retail sales last month contrasts with a detailed look at the trend, which suggests that hopes of a sustained upturn in consumer spending may be premature. The recovery in sales volumes, partly due to a better performance by small corner shops, more than reversed the 1 per cent decline in December. But it reflects deep price discounting by retailers of clothing, footwear and household goods.
Although the January retail price index revealed prices of clothing and footwear were cut by 4.6 per cent, sales volumes were no better than steady. Sales volumes of household goods climbed by 1.4 per cent, but only after 2.3 per cent price reductions.
In the latest three months sales volumes rose by 0.2 per cent. Although sales have reached record levels on this measure - usually a better guide to the underlying trend - the rate of increase has slowed sharply. Central Statistical Office figures show the rising sales trend has tumbled from a 1992 peak of 1.9 per cent in the three months to November.
But Mr Lamont said: 'In the months ahead we are going to have good news and bad news. But (the figures) show we are on the right track.' The Chancellor again quashed hopes that interest rates would be cut to 5 per cent, around the March Budget, saying that on the basis of the latest figures, he did 'not have further reductions in mind'.
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