Rising optimism boosts chances of tight Budget: Surveys show growing confidence in the economy

CONSUMER confidence has stopped falling and is now making a limited comeback. At the same time optimism about the UK economy among company directors and large investors is continuing to improve, according to surveys out this morning.

The uplift in confidence has fuelled speculation that the Chancellor will decide on a tight Budget next week.

Main Budget decisions already made are believed to include an extension of VAT to domestic fuel and power, designed to raise pounds 2.5bn in a full year, coupled with an effective rise in income tax by freezing or restricting the annual rise in personal allowances.

Suggestions that an extension of VAT would have only a limited impact on inflation are backed up by a report today from the Confederation of British Industry, which says that fear of unemployment and the depth of the recession have helped drive down pay awards to the lowest levels on record.

According to the CBI's latest pay databank, settlements across industry are now running at under 3 per cent while one in three companies has imposed a pay freeze since last August.

On Friday the FT-SE 100 index closed at a record high of 2,922.1 as the stock market took the view that recovery might at last be taking hold in the UK economy, helped by the prospect of lower interest rates in Germany.

The latest Smith New Court/ Gallup survey of investment fund managers shows that 22 per cent think the economic situation will get a lot better in the next 12 months, compared with 10 per cent in December.

The Institute of Directors bi- monthly business opinion survey finds that 51 per cent of company directors are more optimistic about the economy now, compared with 38 per cent in December.

In its latest survey of consumer confidence, PA Cambridge Economic Consultants says although the results showed that confidence among consumers was still poor there were indications that a turning point had been reached, with many key indicators showing a recovery after several quarters of decline.

Its index of consumer confidence showed a marginal rise from 72.8 in its last survey in December to 75.2 now, representing an end to the slide since the middle of last year, when the index stood at 93.6.

Households have become less pessimistic about their own financial situation and employment prospects although confidence in the Government remains low, PA says.

'We believe that our results indicate the beginning of an upturn for consumers but that any recovery will be fragile and must be handled with care if it is to continue.'

Infolink, a credit information company, this morning reports an increase in demand for new car loans in January, the fourth consecutive monthly rise.

Describing the latest pay settlement figures as 'extremely good news', Howard Davies, the CBI's director general, said: 'What matters now is that we keep up the progress. If we can do that we will be better placed than when we came out of the last recession to avoid inflation and to seize the competitive advantages in the market place.'

In the three months to January, average pay awards in manufacturing fell to 2.5 per cent while the figure for services was 2.8 per cent - the first time the databank has recorded settlements running at below 3 per cent right across the economy.

Productivity is also outstripping pay increases, with manufacturers reporting a 3.9 per cent rise in productivity in the year to the second half of 1992, against average pay awards of 3.4 per cent.