Jobless fall lifts hope of rate cut

Lower unemployment and slower growth in pay brought new hopes of a cut in base rates yesterday. Official figures showed that the number of people claiming unemployment benefit fell in August for the 24th month in a row, to the lowest level since mid-1991, and growth in average earnings in July also declined.

Investors on the stock market reacted with euphoria to this evidence of steady, sustainable growth. Share prices rose to a new high, and the pound recovered to its highest level for six months.

The Confederation of British Industry yesterday warned the Chancellor, however, not to endanger the economy's prospects with a tax-cutting Budget in November to boost the Government's fortunes. In its Budget submission to Kenneth Clarke, the employers' group said going for the popular vote would jeopardise economic revival and run the risk of higher interest rates.

Traders in the financial markets expect a cut in base rates to 6.5 per cent from the current level of 6.75 per cent in time for Christmas. Some economists in the City were a little more cautious, however. ``I am sceptical whether the Bank of England would yet be happy to see base rates declining,'' said Adam Cole of investment bank UBS.

Ministers moved to dampen expectations of tax cuts yesterday with William Waldegrave, Chief Secretary to the Treasury, admitting difficulty in finding savings in public expenditure to make room for tax reductions.

As the Chancellor chaired the second meeting of the Cabinet expenditure committee in two days to pinpoint priorities in spending, Mr Waldegrave said the Government could not risk losing its reputation for fiscal probity by tax cuts that were not soundly based.

"I do not think the electorate would be at all impressed, nor would the economists, nor would the markets, and nor would it be the right thing to do, if they thought tax cuts were going to be simply a gimmick and reversed," Mr Waldegrave said.

The warning came on the eve of an all-day Cabinet at Chequers convened by the Prime Minister to discuss policy and Tory party strategy up to the general election. Besides discussing reports of ministerial committees charged with drawing up proposals for the manifesto, the Cabinet will discuss long-term issues, especially an agenda for social security reform including provision - and self-provision - for the elderly in the next century.

Gillian Shephard, Secretary of State for Education and Employment, welcomed yesterday's figures showing unemployment falling below 2.3 million. ``Many opportunities are available for people seeking jobs. Last month the numbers placed in jobs by JobCentres were the highest ever,'' she said.

But Harriet Harman, Labour's employment spokesperson, said: ``The Government's complacency about today's figures will confirm in people's minds that they are out of touch and they simply do not care.'' She said the internationally accepted definition of unemployment - the number of people looking for work, rather than the number claiming benefit - had risen above 2.4 million in the three months to May.

n Small firms will be at the centre of a government attempt to boost the enterprise economy, to be launched by John Major next week, according to an interview in the Daily Express. The Cabinet is to meet industrialists to work out a plan to increase the export and jobs potential of firms of fewer than 100 people.

Civil Service cuts, page 2

City reaction, page 16

Comment, page 17