Threat to raise UK taxes wins backing

THE ORGANISATION for Economic Co-operation and Development yesterday gave implicit backing to Kenneth Clarke's threat to raise taxes in the November Budget, writes Peter Torday.

In its latest assessment of the UK economy, the OECD also upgraded its forecast for economic growth to 1.8 per cent this year, a sharp upwards revision from the 1.3 per cent predicted last December.

'Should the recovery in consumer confidence and low inflation be maintained, output growth could well be greater than projected,' and pick up to 3 per cent next year. But it said unemployment would none the less remain stubbornly high over the next 18 months.

It said Mr Clarke had 'little room' for further cuts in base rates. The inflation outlook in the short term was benign, but inflation expectations remained above the Treasury's 1-4 per cent target for underlying inflation. For the moment, however, the considerable slack in the domestic economy and stable unit wage costs should offset the substantial rise in import prices caused by sterling's steep depreciation.

The OECD assessment of Britain's fiscal position showed that tax increases scheduled for 1994 would not fully reverse a 1 per cent rise in Britain's structural public sector borrowing requirement this year. But the level of the structural deficit, or that portion of the PSBR that is unrelated to recession, is put at about two-thirds of the total PSBR, excluding privatisation proceeds, this year and next.

The OECD did not explicitly urge Mr Clarke to raise taxes or cut public spending. But it warned that the recent sharp deterioration in the PSBR was not entirely due to recession. 'Future tax increases now being legislated in the UK may be essential to credibility' in the financial markets.

Without a fiscal tightening this autumn, the OECD said, the ratio of net public debt to national output will surge from 35 per cent in 1991-2 to 52 per cent in 1997-8, a return to the levels of the early 1980s.

The organisation also warned that a return to low inflation and 3 per cent growth rates could be jeopardised by the re-emergence of large current account deficits.