Budd says new taxes could slow recovery

THE TREASURY said yesterday that the smooth climb out of recession could be temporarily driven off course when the Budget tax increases take initial effect next April.

Alan Budd, the Treasury's chief economic adviser, said a 'pause' in the recovery following the imposition of tax increases 'might be the kind of possibility we have in mind'. Analysts said his remarks lent weight to speculation that base rates were set to fall further in 1994.

Next April, the Budget raises taxes by pounds 1.675bn and squeezes public spending by pounds 3.6bn. In addition, the March Budget sets tax increases next April of pounds 6.725bn.

In evidence to the Treasury and Civil Service Select Committee, Professor Budd noted that the Budget Red Book said the pace of recovery might be more uneven from now on, especially in view of its remarkably smooth path until now. But he said the Treasury drew some comfort from the fact that consumers had so far ignored the impending tax increases announced in March and consumer spending was growing at 2 per cent a year, rising to a forecast 2.25 per cent in 1994.

That prediction partially reflects a projected rise in investment income and higher income from self-employment.

But Professor Budd said: 'We do admit this is a recovery of considerable uncertainty. We don't know how consumers will react.'

The uncertainty would become less significant once the world economy started to recover and the medium-term projections of 3 per cent annual average growth from 1996/97 could be outstripped. 'There is certainly scope for it,' Professor Budd said. If fiscal policy had not been tightened further in the November Budget it would have been squeezed later under worse circumstances, he maintained.

By the third year of Kenneth Clarke's Budget plans, fiscal policy will have been tightened by between pounds 15bn and pounds 17bn annually, after taking account of the March measures announced by Norman Lamont, the former Chancellor, he said. Professor Budd expressed surprise at the Joseph Rowntree Foundation report disclosing a continued rise in negative equity in the housing market. The Red Book acknowledges that the housing market remains weak, but argues that consumer demand has managed to recover anyway. The Red Book also notes that home ownership is now more affordable than for many years.