New Labour 'poses no danger to the economy'

As the Conservative Party conference opens in Bournemouth today, an independent report predicts that a new Labour government's policies would not harm economic growth.

The forecast by the Ernst & Young Item Club, which uses the Treasury's computer model of the economy, foresees strong growth in 1997 and 1998.

Strong investment and consumer spending are likely to drive the return to above trend growth.

The findings will disappoint Conservative politicians, who had hoped to argue that a Labour government would cause severe problems for the UK economy. According to the Item survey, "New Labour" poses "no danger" - a reference to the Conservatives' controversial advertising campaign.

The report can find little ill effect from either the introduction of a minimum wage, a firm Labour commitment, or a higher-rate tax band for people earning above pounds 100,000, a move widely expected of a Labour government.

It otherwise assumes Labour will follow policies on interest rates and levels of borrowing very similar to those of the Conservatives. Item's chief economist, Paul Droop, said: "The possibility of a change in government is not likely to change the outlook for the UK economy noticeably over the next couple of years at least.

"Both Conservative and Labour parties would have similar inflation objectives and hence interest rate policy, while public borrowing is too high to allow any large tax cuts or spending increases."

The forecast assumes that the new national minimum wage is set at a low figure of pounds 3 an hour. That is too low to increase unemployment or inflation, although there would be some knock-on effects on wages above the minimum.

Labour has not spelt out much detail on its tax plans, so the forecast assumes that Gordon Brown's expensive commitment to a lower rate of income tax of 10p - costing some pounds 8bn - is financed by a 50p tax rate on incomes above pounds 100,000, the phasing out of mortgage interest relief and an increase in employees' national insurance contributions.

The need to be cautious on borrowing means money would have to be found from elsewhere to finance the lower rate.

On these assumptions, the economy would grow by 3.25 per cent next year, which is the same as the Treasury's forecast, and by 3 per cent in 1998. Inflation would remain slightly above its 2.5 per cent target, although nearly hitting it in the months before the likely election date in May.

The risk, according to Mr Droop, is that the consumer boom could pick up speed, delivering much faster growth but also higher inflation.

"The Chancellor should avoid any political calls to reduce interest rates further," he warned, "as this could cause a repeat of the kinds of conditions experienced in the late 1980s, with a rapid government policy-inspired expansion being followed by a quick stop."

Set up in 1977, the Item Club is a politically independent body wholly sponsored by Ernst & Young, the business and financial advisers.