Budget `97: Doomsday worries grow

Economic growth and consumer spending will fall slightly next year, leading to only a small rise in inflation, according to the Treasury's summer economic forecasts for 1997 and 1998 announced by Chancellor Gordon Brown in his Budget speech yesterday.

At the same time the Chancellor warned that accelerating consumer spending could lead to "unbalanced growth" and the risk of higher inflation in the economy.

But leading City economists, expressing deep disappointment at the Budget's "lack of bite", and warned that interest rates would have to rise almost immediately, fuelling the strength of the pound and further hurting manufacturing and exports.

The Treasury's economic predictions for the next two years paint a picture of a gently slowing economy and a rapid improvement in government finances. Gross domestic product will grow by 3.25 per cent this year, falling to 2.5 per cent next year, according to the Government's public finances Red Book, published after the Chancellor's speech.

At the same time, inflation will rise slightly from this year's 2.5 per cent to 2.75 per cent next year before falling back to 2.5 per cent - the Government's long term inflation target - in 1999.

The Chancellor estimated that consumer spending would be 4.5 per cent in 1997, falling to 4 per cent next year. "With the prospect of further windfalls from the building societies, consumer spending is likely to remain strong," he said.

Economists interpreted the figures as at best an optimistic picture of the economy which may come to pass in the medium term and at worst a worrying lack of action to address the structural weaknesses.

"I am surprised that the Chancellor managed to identify the potential inflationary problems affecting the economy and yet his Budget failed miserably in addressing them," said Jonathan Loynes, an economist at HSBC James Capel.

"The prime reason for the Budget should have been raising taxes to cool down the consumer sector and rebalance the economy. Now the only way to achieve this balance will be through interest rate rises," Mr Loynes added.

Economists remain concerned about the possibility of the economic "doomsday scenario". They see rampant consumer spending, partly fuelled by windfall cash, combined with manufacturing weakness leading to a damaging outbreak of inflation in the economy. Such a scenario would also lead to more interest rate rises and further strength in sterling, damaging the competitiveness of exporters.