OECD praises UK economic policies

The Government's economic policies have delivered the best growth and inflation prospects for 30 years, according to a glowing end-of-year report from the Organisation for Economic Co-operation and Development (OECD).

The one criticism the agency makes is that progress in reducing the Government's budget deficit has been too slow. It predicts that the UK will not qualify for the single currency because the borrowing requirement will exceed the 3 per cent Maastricht ceiling.

In its twice-yearly economic outlook, published later this week, the OECD says strong growth, falling unemployment and low inflation "are the most tangible signs of the positive benefits of past and ongoing microeconomic reforms and a stable macroeconomic policy framework". It is the latest in a stream of publications from the Paris-based organisation, funded by member governments, to lavish praise on Government policies.

Val Koromzay, the organisation's deputy director for economic forecasts, said: "I'm not sure if one wants to be euphoric, but the OECD assessment is that there really are grounds to be solidly optimistic about the near- term prospects for the UK economy."

The Government was delighted by the support for its claims that its policies have helped push Britain up the growth league. Kenneth Clarke, the Chancellor, said: "This independent report from a highly respected international body supports my view that the UK economy is facing the best economic circumstances for a generation."

Indeed, the OECD's vigorously free-market economists say another dose of deregulation and flexibility would bring substantial benefits, even though the UK has already gone much further than continental Europe and Japan.

The new forecasts put Britain in the top half of the league of big industrial countries for growth, with only the Canadian economy expanding faster during the next two years. Its prediction of 3.3 per cent growth next year is below the 3.5 per cent Treasury forecast in the Budget but around the average for independent economists. Consumer spending and private sector investment are expected to drive the above-trend growth.

The OECD foresees unemployment falling below 7 per cent of the workforce by the second half of 1998, the third lowest among the big economies after Japan and the US. The report suggests that falling unemployment could reduce overall inequality even if the distribution of wages widens, providing the Government with some useful ammunition against the charge that income inequality has grown faster in the UK than in any other industrial country.

It reckons interest rates will have to rise, although by a mere quarter point by 1998. But the organisation says inflation will remain below the Government's target, making it much more optimistic than many other economists. Unlike many other forecasters, including the Bank of England, the OECD thinks inflationary pressures have diminished since 1995.

The report says: "Inflation is projected to be below 2.5 per cent in the coming two years, aided in part by a significant rise in sterling's effective exchange rate and some firming of interest rates." It concedes there is some risk of inflationary pressure, but says there are no convincing signs yet that inflation is rising.

This optimistic outlook still puts UK inflation above the average for the G7 countries, at 2.2 per cent in 1997 and 1.9 per cent in 1998, compared with average rates of 1.7 per cent and 1.6 per cent respectively. But it concludes: "Prospects for achieving sustained output growth and low inflation are the best in 30 years, even though fiscal consolidation has been relatively slow."

The outlook for government borrowing is the one area where the think- tank is substantially more pessimistic than the Treasury: "Significant further progress in delivering the planned reduction in public sector borrowing will be needed."

In a forecast made before the Budget, it puts the ratio of government borrowing to GDP at 3.7 per cent in 1997 - the same as Italy - the key year for the decision as to which countries qualify to join the euro. Even the measures announced last month would be unlikely to get this below the 3 per cent ceiling.

Comment, page 15