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Pre-Budget Statement: Economic Forecasts: Growth will rise and then fall back, predicts Labour's voice of caution

THE CHANCELLOR raised his forecast yesterday for economic growth for this year and 2000 but cut predictions for the following two years leading into the general election.

Gordon Brown said growth would hit 1.75 per cent this year - almost double his forecast a year ago. In 2000 the economy will grow by 2.5-3.0 per cent compared with the previous forecast of 2.25-2.75 per cent. But he said growth in both 2001 and 2002 would fall back to 2.25-2.75 per cent. In the last Budget he predicted a range of 2.75-3.25 per cent for 2001.

This puts the medium-term growth outlook in line with the Government's new assumption of trend growth at 2.5 per cent that the Treasury announced on Monday.

"Britain is steering a course of stability and steady growth and we will not take risks with the future of the economy," he told the House of Commons. But he hinted that he would back any increases in interest rates needed to ensure the booming consumer and housing economies did not trigger a return to "boom and bust".

The Treasury said the forecasts reflected the fact that the economy was on track for stable, sustainable growth rather than a period of excessive growth.

The pre-Budget report published yesterday reads: "With stronger growth in the near term and an improving world outlook, output is expected to be just above its trend level during the course of 2000.

"This suggests some slowing down in the pace of domestic demand will be required. By holding the economy close to its stable path over the next few years, a platform for sustained growth can be delivered."

But Mr Brown has a habit of being cautious with his estimates and these may well be beaten again if the economy continues to accelerate, leaving room for upward revision closer to an election.

A year ago, Mr Brown was ridiculed by City economists for forecasting growth of 1.0-1.5 per cent in 1999, at a time when many thought the Russian crisis would trigger global recession. Yesterday he dished out generous helpings of humble pie. "I have been re-reading the debate that took place at the time. There were predictions of recession from experts ... and others," he said to loud laughter from the Labour benches. "But the whole House will be pleased to know that, as the Government forecast, the economy has continued to grow."

Economists said the revisions to growth in 2000 were in line with market expectations. But some said the Chancellor had underestimated the consumer economy and warned that interest rates would have to rise sharply.

The pre-Budget report forecasts that household spending will slow dramatically from 4 per cent this year to 2.25-2.75 per cent in 2000 and 2-2.5 per cent in 2001.

Richard Jeffrey, of CCF Charterhouse, said that a sharp slowdown seemed unlikely given the current low level of interest rates. "We will need steep rate rises early next year to meet these targets," he said.

Douglas McWilliams, chief economist at the Centre of Economics and Business Research, said Mr Brown seemed to be assuming interest rate rises. "There is nothing in this mini-Budget that would slow down growth," he said.

The Chancellor hinted that he would support any future rate rises by the Bank of England to curb inflationary growth. "Early action on interest rates now prevents a return to the drastic action of the past," Mr Brown told the Commons. "Those who refuse to take the necessary pre-emptive decisions to meet the inflation target would risk returning our economy to the days of out-of- control inflation, unbalanced economic growth and 15 per cent interest rates."

The pre-Budget report adds: "Excess strength in household consumption, supported by rapid growth in house prices, poses the clearest risk to the economic outlook."

Mr Brown said the challenge was to be "vigilant", calling on Britain's workforce to take up his employee share scheme "in preference to inflationary wage rises".

Fears about rising interest rates are likely to be heightened today when the Bank of England publishes its quarterly inflation report.

The Bank has already warned of inflationary pressures in the housing and labour markets and the rapid recovery in global demand. It is understood these factors drove the Monetary Policy Committee to raise rates last week.

Mr Brown said his forecasts for sustainable growth would be achieved without triggering inflation. He forecast that RPIX - the inflation measure that the Government and the Bank of England track - would fall to 2 per cent this year. It would then rise to hit 2.5 per cent in each of the next three years, in line with the target.

Philip Thornton