GDP figures will charm Chancellor

The Chancellor and his new team of ministers who gathered yesterday at Chevening in Kent for their pre-budget brainstorming session must have breathed a sigh of relief at the first estimate of national output in the last three months. A serious slowdown in the economy would wreak havoc with a Public Sector Borrowing Requirement (PSBR) failing to show improvement on the comparable period last year.

In the event, the first estimate for GDP in the second quarter was somewhat higher than had generally been expected. The non-oil economy grew faster than in the first three months. The economy is certainly slowing down from the 4 per cent growth seen in 1994. But the initial figures suggest that the Treasury's forecast of 3 per cent growth in 1995 is not necessarily over-optimistic.

Even if growth around this rate can be sustained, the Chancellor's merry band will need to brainstorm into the night if they are to square political and financial imperatives. The politics are clear: tax cuts are vital if the Tories are to stand any chance of reviving their fortunes. Unfortunately, the finances are just as clear: tax cuts cannot be afforded if the Government is serious about cutting borrowing.

Extra spending cuts would offer a way out. But the Treasury's projection of no real growth at all in general government expenditure already looks implausibly tight for any year, let alone a pre-election year.

The implication is that tax cuts are coming and borrowing will take the strain. How convenient that the Government is committed to bringing the PSBR back towards balance in the medium-term. In the long run, we are dead, said John Maynard Keynes. In the medium term, Kenneth Clarke might add, there is a fighting chance of political resurrection. After all, it is the next generation that will have to pick up the bill.