Mixed signals deepen rate dilemma: Weak spending and poor job creation suggest that the economy is slowing in anticipation of tax increases

THE GOVERNMENT'S dilemma over whether to cut interest rates again became more acute yesterday. Weak high street spending and job creation figures suggested that the economy may be slowing ahead of next month's tax increases, but a rise in average earnings growth sounded a warning on inflation.

The fear that resurgent inflation will prevent another rate cut triggered sharp falls in gilts prices. The benchmark 8 per cent gilt due 2013 fell by nearly pounds 2 to pounds 115 26/32, yielding 7.42 per cent. The FT-SE index of 100 leading shares fell nearly 25 points to 3,242.9.

The Government took comfort from a fall of 38,800 in the number of people without work and claiming benefit last month, which dispelled worries that January's rise was the beginning of a new trend. But economists warned that the fall overstated the rate at which the economy was generating new jobs.

Unemployment fell in all regions, with the biggest drops in the North, East Anglia and the South-west. The seasonally adjusted jobless total fell to a 20-month low of 2,751,800, with fewer people joining the dole than in any month for three-and-a-half years. Some 9.8 per cent of the labour force are now unemployed.

But the fall in unemployment in recent months has owed more to a shrinking workforce than the creation of new jobs. Unemployment fell by more than 130,000 in the last three months of 1993, but employment grew by only 15,000. Self-employment jumped by 54,000, but this was offset by a 53,000 fall in the number of employees. This reflected job-shedding in manufacturing, energy, water supply and formerly buoyant service industries.

The Employment Department's quarterly labour force survey suggested that the jobs created by economic recovery are dominated by part-time work for women in service industries. But the survey shows that female full-time employment is still dropping sharply.

Falling unemployment normally encourages people to shop, but the Central Statistical Office reported that the volume of high street spending fell by 0.5 per cent last month, suggesting that consumers may be tightening their belts as next month's tax rises loom. Department stores and household goods retailers fared worst.

Kenneth Clarke, the Chancellor of the Exchequer, said the figures showed that the economy was 'in a recovery that can get stronger'. But Gordon Brown, shadow Chancellor, claimed that they undermined the Government's confidence over the recovery: 'Interest rates should have been cut earlier by more and should be cut now,' he said.

Separate figures yesterday from the Treasury showed that the Government borrowed an unexpectedly modest pounds 4.6bn last month to cover the shortfall between its spending and tax revenue. Downing Street said it now expected the public sector borrowing requirement to undershoot the pounds 50bn Budget forecast, having totalled pounds 34.7bn in the first 11 months of the financial year.

Downing Street presented the undershoot as economic 'good news' yesterday, but it could embarrass the Chancellor by casting doubt on the need for the Budget tax rises. Tory MPs are growing increasingly alarmed about the impact of the tax increases in April on the forthcoming local and European elections. Labour leaders believe the Chancellor could be open to the charge of making taxpayers pay for his mistakes on the PSBR.

February's PSBR was smaller than expected because of erratically high VAT receipts and subdued spending by government departments. But it is normal for spending to rise dramatically in March as departments use up their budgets.

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