Ministers cautious despite 2% growth: Output strong in 1993 but tax rises could endanger recovery

THE ECONOMY grew more strongly in the last quarter of 1993 than in any quarter for five years, official figures showed yesterday. But the Government is concerned that looming tax increases could derail the recovery. Government unease was evident as Michael Heseltine, President of the Board of Trade, said that to give the impression that 'the garden is all rosy' would be unreal.

National output of goods and services rose by 0.7 per cent between the third and fourth quarters, according to figures published by the Central Statistical Office. Bank of England data on bank lending and the amount of money circulating in the economy confirmed the picture of steady growth, which is running slightly more strongly than economists had expected.

National output of goods and services in 1993 as a whole was 2 per cent higher than in 1992, almost double the growth rate City analysts forecast a year ago. That compares with falls of 2.3 and 0.5 per cent in the previous two years. The recovery has been driven by cuts in interest rates and the fall in the pound since Britain left the European exchange rate mechanism in 1992.

The Chancellor yesterday stuck to his Budget forecast of at least 2.5 per cent growth this year. The economy has now grown for seven successive quarters, equalling the duration of the recession. About 85 per cent of the fall in output during the downturn has been reversed. The record is slightly less impressive when volatile North Sea oil and gas production is excluded, giving 0.5 per cent growth in the fourth quarter and 1.8 per cent for 1993 as a whole.

Growth was evenly spread across most parts of the economy, with only agriculture, construction and government services lagging behind. Manufacturing output is thought to have grown by about 0.5 per cent in the fourth quarter.

A survey of consumers by Gallup for the European Commission showed that most people are still relatively unconcerned that the tax rises will hurt either the economy or their finances. Confidence is higher than before the November Budget and people are more willing to buy big items than at any time since 1988.

Defending the Chancellor's recent admission that tax rises would 'check' recovery, Mr Heseltine said: 'It isn't a question of eliminating the recovery. It is of course an economic factor that is going to have a negative effect against which you have to set the positive effects.'

Most positive was the very substantial increase in spending made possible by falling interest rates, he said on BBC Radio 4's The World at One. Tax changes would be coming through in April at the same time as building societies reduced mortgage payments.

But he went on: 'The Chancellor is determined not to give the impression that all the problems are over, that there won't be any hiccups, that the garden is all rosy and set fair. That's not life. It's not economic reality.'

The FT-SE index of 100 leading London shares rose 14.2 points to close at a record 3,484.2. The market has been driven upwards in recent weeks by the prospect of another interest rate cut to boost recovery. City economists believe the Chancellor is holding fire until he sees the effect of the tax rises, but most expect base rates to fall by at least another half- point to 5 per cent sometime in the spring.

Mr Heseltine's remarks came as Labour prepared to challenge Tory opponents of value-added tax on domestic fuel to rebel in the Commons and force redrafting of the Finance Bill.

Gordon Brown, Labour's shadow Chancellor, said: 'What people now understand is that they are going to pay extra tax on their bills, from their wage packets, on their mortgages and the pounds 3 to pounds 4 a week rise in National Insurance.'

He published a list of 12 Tory MPs who have argued against VAT on fuel. However Labour has been able to reopen the issue only by tabling an amendment to a motion for next Tuesday's Second Reading of the Finance Bill, stating that the Bill is not acceptable because it fails to repeal the tax. Rebels would be voting against the whole Budget legislation.

Nicholas Winterton, Conservative MP for Macclesfield and a past rebel, said he would vote to remove VAT on heat and light, but he could not destroy the whole Bill.

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