Gordon Brown is being accused of manipulating his economic policies to deliver an unsustainable boom in the run-up to a general election year that will leave Britain with an immense financial hangover.
A group of independent economists claims that the Chancellor of the Exchequer has "conjured up a classic pre-election boom" by ignoring fears of a black hole in public finances to boost government spending and changing the way the Bank of England sets monetary policy to keep down mortgage rates and support the housing market.
The accusation, in a report published today by the Independent Treasury Economic Model (Item), run by the accountants Ernst & Young, comes as Mr Brown was forced to defend himself against criticism from the International Monetary Fund, which used its keynote economic report at its annual spring meeting in Washington DC to warn that a crash in house prices was the biggest threat to the British economy.
The Chancellor, who has insisted he has put an end to the years of cyclical economic boom and bust, said the report's authors had got their growth forecasts wrong and should show "more humility". He also issued a defence of the Government's housing policy, saying the market was on a more solid foundation than a decade ago when prices crashed under Conservative chancellors. Item said the economy will enjoy growth this year and next at levels not seen since the late 1990s, when the world was gripped by a stock market bubble that burst, plunging the world into recession.
Peter Spencer, an economics professor and chief adviser to Item, said: "After three years of misfiring, the economy is now firing on all four cylinders. The Chancellor's manipulation of the economic cycle is either extremely skilful, very lucky or a bit of both it's not just a happy accident." He accuses the Chancellor of changing the inflation measure the Bank targets when it sets rates from the so-called RPIX measure currently at 2.6 per cent to the European CPI measure now at 1.1 per cent to deliver lower borrowing costs. "The new CPI inflation card, cleverly deployed in the context of last year's euro debate, now looks like an election winner," he said. "With CPI at 1.1 per cent, threatening to crash through the floor, it will be presentationally difficult for the monetary policy committee to raise rates."
The report also said that the Chancellor was boosting growth by raising spending by billions over the next few years in the face of claims by independent analysts that the Government will have to raise taxes to prevent it breaching its own "golden rule", that it must balance the books over the economic cycle.
"[Mr Brown] continues to play his fiscal cards aggressively despite the approaching void in this suit," Professor Spencer said. Item, which uses the Treasury's own economic model, forecast that the economy would grow by 3.25 per cent in both 2004 and 2005. It said business investment was up, high street spending was surging, the stock market was rising and house prices were booming.
"All is surely rosy in the garden," he said, adding that the Bank would eventually have to raise interest rates to 5 per cent. This will land households labouring under a record debt mountain with higher mortgage bills, which could trigger a rise in bankruptcy and home repossessions which in turn could lead to a consumer recession.
Oliver Letwin, the shadow Chancellor,said: "This economic boom is being led by a combination of household consumption and public sector expansion. The issue is how sustainable will it be after the next election."
Paul Tucker, a member of the Bank of England's monetary policy committee, indicated that the interest rate of 4 per cent would most likely rise as the economy showed no signs of slowing to trend growth levels.
The Chancellor, who chaired a meeting of the IMF's ruling monetary and financial committee, said that Item produced the same report every month. "It is a continuous exercise of playing politics with stability," he told The Independent. "People recognise that inflation is below target and we have met our growth forecasts ... I would have thought that some humility on the part of these forecasters would be appropriate."