Brown steels himself for fresh clash with IMF over outlook for UK economy

The IMF is expected to slash its outlook for the British economy to just 1.9 per cent this year and 2.2 per cent in 2006, according to the latest leaks. This compares with robust growth of 2.6 per cent for both years just six months ago. More significantly, it is far below the bullish forecast of growth of this year of between 3 and 3.5 per cent that Gordon Brown has held since April 2003.

The expected forecast revision from the IMF comes in a week when the Chancellor's policies are also being scrutinised in Europe, where Joaquin Almunia, the EU monetary affairs commissioner, is set to warn Mr Brown that his current policies risk putting the UK in breach of the EU's borrowing rules for the next two years.

The added frisson comes from the fact that Mr Brown will fly to Washington tomorrow to chair the IMF's key international monetary and financial committee (IMFC).

The IMFC often hands down reprimands to countries whose economic policies and ambitions have lost touch with the reality of life at the grass roots. Earlier this year, when the IMF cut its growth forecast to 2.6 per cent, the tensions broke out into the open. Sharing a platform with Rodrigo de Rato, the IMF's managing director, the Chancellor said the IMF was plain wrong. "I do not accept the IMF statement about the British financial figures. I may say - and I say this with respect to the staff at the IMF - they have been wrong about British growth ... and I believe the figures are wrong again from the IMF," he said.

A fresh cut in the IMF's outlook will be seized upon by the Chancellor's critics within the House of Commons and the City's analyst community.

During his eight years as Chancellor, Mr Brown has enjoyed hinting at the contrast between the Labour government of the 1970s that had to borrow money from the IMF, and his position as someone who can reprimand the fund for errors in its forecasts.

As well as being a metaphorical slap in the face for Mr Brown, a new cut in the IMF's UK growth forecast will cast fresh doubt on the Treasury's tax and spending plans. The Chancellor insists the deficit in the public finances peaked last year at £35.4bn and will fall to £32bn in the current year, declining steadily to £22bn by 2010.

Professor Peter Spencer, of York University, who advises the Ernst & Young Item Club forecast unit that uses the Treasury's own model, said a 1.9 per cent growth rate was now the consensus view of economists. "The Chancellor will have to say that his growth forecasts have been undershot but he will be blame the oil price for that - quite wrongly," he said.

"Growth is very little to do with oil - $10 on a barrel of oil takes 0.25 per cent of growth - but the consumer slowdown and the follow-through into the industrial side. The public finances are currently benefiting from a lag effect from last growth but they are going to collapse within a matter of months."

The Treasury was sticking yesterday to its mantra that it revises its forecasts only in the Budget and the pre-Budget report that takes place in November or December. "We are not going to provide a running commentary on leaks," a Treasury spokeswoman said. "Recent economic data have shown that the economy is growing faster than all our major competitors."

The Chancellor has repeatedly insisted that all his spending plans are fully funded and that he will meet his "golden rule" - to borrow only to invest over the economic cycle - at all times over the period of his forecast. Recent figures on the public finances showed a marked surge in tax revenues, while trade figures in June appeared to show a spike in exports, although that failed to continue into July.

Neville Hill, the UK economist at CSFB, said many of the doom-mongers' gloomier forecasts had failed to come to pass. "Warnings of a negative housing market have not yet materialised," he said. With wages growing at 4 per cent and employment by 1 per cent, it was quite likely that consumer spending would soon return to trend levels, he said.

"We are past the trough in growth and the worst is behind us," he said. "We may have had growth of 0.5 per cent in the second quarter but that's a growth rate the euro area can only dream of."

Whatever his critics might say, Mr Brown is certain to use the IMF meetings to continue to pile pressure on the oil-producing countries.

The issue of high oil prices will be a major feature at the IMF meetings, as they have been since September last year. The threat to economic growth from oil at $70 a barrel is, of course, exacerbated by the destructive impact on the US refining capacity of Hurricane Katrina.

Thierry Breton, the French Finance Minister, has said he and Mr Brown will call for a delegation from the Group of Seven nations visiting the major oil exporting nations to seek more transparency in the market. Their hand may be strengthened by the decision by members of the oil-producing cartel Opec to fall short of raising output at their meeting on Monday.

The IMF is certain to blame higher oil prices for cuts to forecasts for growth in the US, France, Germany and the overall world economy.

Away from the hurly-burly around the economic forecasts, Mr Brown had hoped that this week would mark the defining moment in his campaign for debt relief for the world's poorest countries. The Chancellor was instrumental in driving a deal through the G8 finance ministers in the spring that was then endorsed by the meeting of G8 heads of state at Gleneagles, Scotland, in July. Under the deal, 100 per cent of the stock of debt owed by 18 of the world's poorest countries to international lenders such as the World Bank would be cancelled.

However, the deal, which narrowly survived being watered down at the UN summit last week, has now come under attack from within the World Bank. According to a leaked report, the bank has warned that its funding arm, the International Development Association (IDA), would be severely hampered if it were forced to write off the debts.

It estimated the G8 plan could cost it as much as $57.7bn (£32bn) rather than the envisaged $5.7bn. "As the potential impact on IDA could be substantial, executive directors [should] consider the impact on IDA's financial position," it said.

It also raised the prospect of imposing conditions on beneficiary countries, which campaign groups said would be contrary to the spirit of the original G8 deal. The deal, which would have to be approved by the bank's board, is under attack from some European countries that are worried that poor countries outside the deal will lose out as a result.

Dave Timms of the World Development Movement, said: "The World Bank seems happy to interpret the G8 communiqué mention of 'transparency and good governance' as a go-ahead for bog-standard economic conditions."

Make Poverty History, the alliance of charities, said in a letter to Mr Brown and Hilary Benn, the Secretary of State for International Development: "These meetings are a test of the international commitment on these issues. The Government should invest substantial effort to ensure the G8 agreement on 100 per cent cancellation of debts is implemented in full."

As he flies out to the US tomorrow Mr Brown must be hoping his visits to the IMF's headquarters do not start to provide the sort of headaches that they did for his Labour predecessors all those years ago.