Interest Rates: Clarke predicts tough public spending round after rate rise

A HARD public spending round was predicted by Kenneth Clarke yesterday, on top of the interest rate rise and his dismissal of tax cuts in this year's budget as 'not serious politics'.

Treasury forecasts still put public borrowing at pounds 36bn for this year, the Chancellor said. And while he believed the figure might be less than that, factors which unexpectedly played in the Government's favour last year - such as local authority borrowing and Britain's contributions to the EU - could go the other way this year.

At last year's budget, Britain's European contributions proved to be pounds 1.3bn less than forecast, in part because the European financial year does not march in step with Britain's. This year the contributions could 'go the other way' Mr Clarke said, and the control total for public spending 'is actually a very difficult one'.

His warning came as Tony Blair, the Labour leader, dubbed the rise 'a huge blow to business and home owners' and the Liberal Democrats said it was an 'indictment of Government policy'. Mr Blair took care not to condemn the interest rate rise itself - saying rather it showed the failure of Government policy. 'If the Government is being advised that inflation is back in the system they have to act upon it,' Mr Blair said. But it illustrated 'the fundamental failure of Conservative policy to build a wealth generating industrial base to our economy that can sustain people's living standards and growth long-term.' The rise divided Tory MPs - some alarmed that it would stifle recovery while others backed the Chancellor's action. Bill Cash, MP for Stafford, said the rise was 'not helpful'.

David Sumberg, MP for the marginal Bury South said there had been a real recovery but it had not translated into a 'feel- good factor'. The rise could increase the sense of fear.

Kenneth Clarke was also backed by Norman Lamont, his predecessor as Chancellor. The decision was 'right economically and right politically', he said.

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