Brown 'will miss spending forecast'

Brown 'will miss spending forecast'

Gordon Brown is unlikely to meet his forecasts for this year's public finances because of the sharp slowdown in the economy, a respected thinktank warns today. But he will also be unable to raise taxes in the short term to help fill the gap, according to the Ernst & Young Item club.

The Item Club has reduced its forecast for economic growth this year to just 2.1% from 2.7%, way below the 3% to 3.5% predicted by Mr Brown in the March budget.

"The slowdown in the economy is extremely bad news for the chancellor because the public finances are particularly sensitive to changes in the growth rate," says Professor Peter Spencer, the Item Club's economic adviser.

"Moreover, the weakness in the economy means that [Mr Brown] will have to delay the necessary fiscal correction beyond next year's budget, piling up trouble for later years."

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Mr Brown last week changed the Treasury's assumption about when the current economic cycle began from 1999 to 1997, in effect handing himself an extra £12bn to ensure that his self-imposed golden rule - that deficits and surpluses should at least balance out over the cycle - could be more easily met.

The chancellor is forecasting a deficit of £32bn this year, but Item says he could miss this target by £6bn.

Many economists, including Prof Spencer, say that tax rises will eventually be needed because part of the deficit is structural, rather than cyclical.

The City had been expecting Mr Brown to raise taxes again in next year's budget, but with the economy now weaker than expected, it is hard for him to raise taxes at the wrong point in the economic cycle.

Prof Spencer argues that Mr Brown is simply pushing the problem into the future. "All the chancellor has effectively done is move the deck chairs on the Titanic."

Regarding the wider economy, the Item Club's latest report said the country's investment and export levels have remained poor, in spite of strong growth in the world economy and a strong recovery in company profits.

"The failure of investment and exports to take up the slack is very worrying and has reached a critical stage, keeping the economy off balance," said Prof Spencer.

The Item Club expects an interest rate cut from the Bank of England on August 4 in response to slowing consumer spending and a slack housing market. But it predicts the Bank will then sit back and wait to see the effect of the reduction on the economy.

Prof Spencer said despite the current problems, the outlook for consumer confidence was fundamentally sound, as the housing market was showing signs of recovery and tax rises would not come before 2007 at the earliest.

As a result, he said, the economy should return to stronger growth next year.

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