Brown stakes reputation on Budget gamble

GORDON BROWN staked his credibility on Britain bouncing back strongly from next year's sharp downturn when he produced a surprisingly optimistic forecast for the economy yesterday.

In what was seen as a gamble by industry and opposition parties, the Chancellor defied the global economic gloom by insisting in his pre-Budget statement to the Commons that Britain was in a strong position to weather the storm.

He announced a pounds 250m one-off cash injection to help the National Health Service care for the elderly this winter. The money will provide extra beds, operations and accident and emergency treatment and follows warnings by NHS trusts that the service could not cope with a flu epidemic.

Mr Brown's optimistic forecasts for growth from 2000 onwards will put pressure on the Bank of England's monetary policy committee to cut interest rates at its monthly two-day meeting starting today.

The Chancellor's figures were seen as a signal that he expects the Bank to make further prompt reductions. Industry is clamouring for a half-point cut, and Mr Brown noted that the Bank had already lowered rates by 0.25 per cent to 7.25 per cent "to respond to a changed international environment".

Mr Brown's figures revealed that government borrowing would rise by a total of pounds 11bn over the next five years because of the world recession. However, his optimistic forecasts for growth allowed him to predict that Britain would enjoy a current budget surplus totalling pounds 33bn over the same period.

The Chancellor revised his previous prediction that Britain would enjoy growth of between 1.75 per cent and 2.25 per cent next year down to between 1 per cent and 1.5 per cent. His sums are based on growth of just 1 per cent. However, he uprated his forecasts for the following three years, saying the economy would be growing by between 2.75 per cent and 3.25 per cent by 2001.

The business world reacted to the rosy forecasts with disbelief at a time when it fears Britain may on the brink of a recession. "The Chancellor's optimism is likely to raise eyebrows," said Kate Barker, chief economist at the Confederation of British Industry.

Some City experts were sceptical, with James Barty, at Deutsche Bank, saying: "The Chancellor has fallen into the same trap as all his predecessors of being too optimistic about the public finances." Business fears were reinforced yesterday when Marks & Spencer, a bellwether for the health of the economy, announced its first fall in profits since the last recession.

The Tories described Mr Brown's growth predictions as "incredibly reckless". Francis Maude, the shadow Chancellor, attacked his "fantasy forecasting and Peter Pan economics", while William Hague, the Tory leader, said it was "extraordinary" for Mr Brown to upgrade his figures when all other forecasters were downgrading theirs.

Mr Brown insisted he was not taking chances, telling MPs there was "no denial of short-term difficulties, no diversion from long-term strength".

His aides said his growth predictions were cautious, and that unexpectedly strong tax revenues and higher than expected growth this year had given the economy a strong base. This left the Government with a pounds 1.5bn surplus this year, rather than the expected deficit, although the downturn will create a pounds 4bn borrowing requirement next year.

The Chancellor announced new measures to make Britain's firms more competitive and help new businesses to start up, including eight "institutes of enterprise" in universities and fewer planning regulations so that Britain can emulate America's high-tech Silicon Valley.

Downing Street announced last night that the Prime Minister, Tony Blair, will set up a new cabinet committee to boost Britain's productivity, chaired by Mr Brown. Measures in next spring's Budget will aim to double the number of companies in which employees have the right to own shares.

The Budget will also include measures to encourage motorists to "go green", with a pounds 50 reduction in vehicle excise duty for the smallest and most environmentally efficient cars.

Most economists accepted Mr Brown's prediction that government borrowing will be only modestly higher than his previous targets, and his pledge that he would meet the "golden rule" that borrowing would never exceed public investment over the economic cycle.

Most experts also agreed with his insistence that Treasury assumptions about borrowing were cautious. However, a significant minority backed opposition claims that the Government was staring into a "black hole" in its finances.

Special Report, pages 11-14