Clarke kills off tax cut speculation: Gross domestic product reaches a four-year peak as the Chancellor affirms belief in a 'feelgood recovery'

KENNETH CLARKE yesterday moved to quash speculation that the Government might exploit an unexpectedly bright outlook for public borrowing by cutting taxes to boost government popularity.

His comments came as official figures showed that the economy has finally recouped the fall in output suffered during the recession of 1990-92. Gross domestic product rose by 0.7 per cent in the first quarter, taking national output of goods and services back to the peak reached in the spring of 1990.

Excluding buoyant North Sea oil and gas production, growth was 0.6 per cent in the first quarter, leaving output 0.5 per cent below its peak on that measure. The CSO said that output of service industries was 0.6 per cent up on the previous quarter and 1.5 per cent above its 1990 peak.

Factory output was estimated to have grown by more than 0.8 per cent and construction output by more than 1 per cent.

The figures were almost exactly in line with City expectations and produced no reaction in the markets, where gilts fell in sympathy with overseas government bonds.

Mr Clarke said that the economy had improved despite depressed consumer confidence. 'I actually think it will be a feelgood recovery because it will last and will be sustained, but people are not going to be impressed by any tax cuts that are just designed to win political popularity,' he said during the International Monetary Fund's spring meeting in Washington.

The Chancellor said that the Government's borrowing had improved more quickly than had been expected at the time of the November Budget. The task of eliminating the public sector borrowing requirement would be achieved 'somewhat faster than projected at the time of the Budget', he added.

Mr Clarke said progress on borrowing would not be used as an excuse to increase public spending plans and ministers had not yet pressed him to increase their budgets. The Treasury challenged IMF projections showing the PSBR falling to 7.4 per cent of GDP this year and 6.2 per cent in 1995 as over- pessimistic. Officials said the figures did not take full account of measures announced in November.

Meanwhile, Britain recorded its biggest underlying trade deficit with countries outside the European Union for 10 months in March, casting some doubt on the long-term durability of recovery.

The non-EU visible trade deficit widened from pounds 640m in February to pounds 675m last month as imports fell by 1 per cent and exports by 2 per cent, the Central Statistical Office said yesterday. But excluding oil and erratic items - such as ships, aircraft and precious stones - the deficit grew from pounds 683m to pounds 702m, the biggest shortfall between imports and exports since last May.

The non-EU trade deficit has been fluctuating either side of pounds 700m a month since it stopped narrowing on a trend basis last summer. Both imports and exports are growing at a very slow rate.

Jonathan Loynes, of Midland Global Markets, said a fall in imports of semi-manufactured goods could point to future weakness of manufacturing output.

Comparing the first quarter of 1994 with the last quarter of 1993, the physical volume of exports has fallen by an underlying 1 per cent, while the prices exporters have charged have risen by 2 per cent. Import volumes are up by 1.5 per cent on the same basis while import prices have risen by 0.5 per cent.

However, the CSO said it had revised February's figures to cut its estimate of import volumes by 4 per cent and raise its estimate of import prices by roughly the same amount. This is not expected to have a significant effect on estimates of growth in the economy.

Non-EU trade figures are published two months before EU figures because the latter have been estimated from VAT returns rather than customs declarations since the beginning of last year.

The EU trade gap fluctuated from quarter to quarter last year, but the figures have been widely dismissed as inaccurate. The CSO and Customs and Excise will announce the results of a quality check for the figures next month.

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