Chancellor eases limits on spending

GORDON BROWN, the Chancellor of the Exchequer, yesterday eased government spending limits by saying he would allow overall spending to grow by 2.25 per cent a year in real terms over the next three years, the maximum possible if separate prudential targets are going to be achieved.

However, he committed the Government to spending virtually all that increase on investment in education, health and infrastructure.

In a wide-ranging overhaul of public spending, the Chancellor promised to increase the amount the government spends on capital projects to 1.5 per cent of gross domestic product from 0.75 per cent at the moment. That amounts to pounds 29bn a year by 2002, the end of the current parliament.

The new targets would still allow the Government to reduce the ratio of current spending to GDP to below 40 per cent, Mr Brown told an audience of international financiers at the Mansion House in the City.

Also at the Lord Mayor's Mansion House banquet, Eddie George, Governor of the Bank of England, fiercely and wittily defended the Monetary Policy Committee's decision last week to raise interest rates by 0.25 per cent to 7.5 per cent.

Mr George said: "There is no question but that the strength of the domestic economy must moderate further - as indeed we expect that it will.

"But the external influences - which we can anyway not do much about, but which will in time wear off - made this moderation of domestic demand growth less immediately urgent than it would otherwise have been," said the Governor.

"In these circumstances, with some evidence that growth in the domestic economy was in fact slowing, and given the evident pressures on the internationally exposed sectors, we needed, in my view, to be more than usually confident in our judgement as to the need to tighten policy further," he said.

Mr George also attacked the media's fascination with "hawks" and "doves" on the MPC. "Serious economic commentary seems - perhaps temporarily - to have ceded some ground to ornithomancy - the ancient art of divining the future by observing the behaviour of birds."

Separately, the Chancellor said that within the Government's new fiscal framework, current spending will grow in line "with our cautious estimates of the trend rate of growth of the economy - that is 2.25 per cent in real terms each year."

Mr Brown said that as a result of the need to take a more cautious fiscal approach, "the plans we publish today are for a surplus on the current budget next year of pounds 7bn; in 2000-2001 pounds 10bn and in 2001-2002 a surplus of pounds 13bn". He added that current spending is now planned to be 39.25 per cent of GDP every year for the rest of the parliament.

The Chancellor went on: "In the interests of greater stability, I propose to bear down on the debt:GDP ratio. Indeed the plans we are publishing show the debt ratio falling from 45 per cent when we came into government to 40.5 per cent next year and in the following years down again to 39.5 and 38.25 per cent.

"Britain will now plan on the basis that our debt:GDP ratio will be 40 per cent or lower."

The Chancellor warned the audience of financiers that Britain's capital markets must be reformed if London is to survive overseas competition.

Mr Brown said: "In the first half of the 1990s Nasdaq in the United States raised seven times more capital than all the European equivalents together. Its listed companies employed nine million people and created 16 per cent of all new jobs.

"So we need a new approach in Britain to risk-taking that will increase the number of entrepreneurs and raise the growth and survival rate of small businesses. We must destroy the barriers that hold us back - fiscal, regulatory, economic, cultural - as a matter of urgency," he said.

The Chancellor also reaffirmed the Government's pro-EU stance: "For the first time we are as a country committed, in principle, to European monetary union," he said. "And I believe that a new national consensus on Europe the very consensus that has eluded us for years is now within our grasp."