Treasury cuts back growth predictions

Economy: Outlook worse now than last November, but City says Chancellor is still over-optimistic

DIANE COYLE

Economics Correspondent

The outlook for the British economy is worse now than it was at the time of the Budget seven months ago.

Treasury officials have cut their predictions for growth and raised them for inflation and public borrowing.

But City economists said last night that Chancellor Kenneth Clarke's view of prospects was over-optimistic.

Mr Clarke said there would be tax cuts when it was appropriate. "The public wants tax reductions that are met by controlled public spending and are in the interests of the British economy," he said.

He repeated his determination to deliver steady, sustainable growth, saying Britain was enjoying the best combination of economic circumstances since the 1960s. "Growth has slowed as I intended it to," he said.

The forecast concedes that the depth of the housing market's weakness had been "surprising". It predicts little change in house prices until the second half of 1996.

The lower forecast for economic growth brings the Treasury into line with the consensus among independent economists. Cynics among them concluded that there was no political mileage for the Chancellor in being over-optimistic about the pace of activity.

However, there was disagreement with the predictions for inflation and the public sector borrowing requirement, where Mr Clarke has more pressing reasons to take an optimistic view. Fears in the City of a tax giveaway or a forced rise in interest rates as a result of the Tory leadership contest took share prices lower again, although other financial markets were calm.

The official forecast says the economy will expand by 3 per cent this year, the targeted measure of inflation will be 3 per cent at the end of the year, and the PSBR will be pounds 2bn higher than expected at pounds 23.5bn.

In 1996 growth is forecast to slow further, to 2.75 per cent. But officials predict inflation will be back down to 2.5 per cent by the end of the year, while the PSBR will fall to pounds 16bn - pounds 3bn more than the original plan.

Treasury forecasts never spell out prospects for two other key indicators, unemployment and interest rates, since this would create hostages to fortune.

Behind the revisions to the official forecast lie unfavourable developments in recent months: consumer spending and investment declined in the first quarter, while trade trends have taken a turn for the worse.

The investment performance has been particularly disappointing. The official forecast for this year's rise in business investment is 4.75 per cent, compared with 10.75 per cent in the Budget forecast. The investment surge has been postponed to 1996, and the official forecast for next year is also lower than it was last November. A senior Treasury official said manufacturers seemed to have delivered a growing level of output without investing in extra plant.

The outlook for growth in consumer spending this year has also been adjusted down, to 2 per cent from 2.5 per cent. The Treasury reckons that spending will rise 3 per cent in 1996, even though the pace of economic expansion will be slowing further.

The lower profile for consumer spending and investment make for reduced import forecasts, but the Treasury sees another two years of buoyant, if slowing, export growth.

Despite an unexpected balance of payments deficit in the first quarter, it puts the full-year deficit at only pounds 2bn, down from pounds 4bn in the Budget forecast.

Paul Wallace, page 22