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Wednesday, 27 November, 2002, 16:43 GMT
Brown warns on the economy

The chancellor has put a brave face on his economic difficulties, arguing that the UK will still have the strongest growth among industrial countries despite the world economic slowdown.

Gordon Brown said that Britain was facing the sharpest slowdown in global activity for almost 30 years, with 20 of the world's leading economies in recession, including Japan, Germany and the United States.

Pre-Budget report economic forecast
Growth: Down from 2.5% to 1.5% this year, 2.5% next year
Borrowing: Up from 11bn to 20bn this year, 24bn next year
Taxes: National Insurance up 1% from April
He said that thanks to the tough decisions taken over the past five years, the UK and North America would grow faster than any other major economy this year and next.

But he admitted that UK growth this year would be much less than he forecast, down to 1.6% compared with his earlier forecast of 2% to 2.5%.

He said that the economy would recover to 2.5% to 3% next year, and between 3% to 3.5% in 2004.

BBC Economics Editor Evan Davis says that Chancellor is being optimistic in projecting such strong growth in the future.

Borrowing fears

And public borrowing will rise to 20bn this financial year, and to 24bn next year -double the chancellor's previous forecast.

Over his five year forecast period, he has added an additional 28bn to borrowing, taking the total to 101bn.

This has sent alarm bells ringing in the City and among financial institutions.

But Unison boss Dave Prentis said that "the City should hold its nerve, like the Chancellor, and not make alarmist comments about the risk to interest rates."

Mr Brown said that the UK was still borrowing less as a percentage of gross domestic product than Germany, the US or Japan.

That will be small consolation, however, unless Mr Brown can continue to meet his own fiscal rules.

The chancellor says that is not in danger, and intends to publish a discussion paper setting out the long-term budget position and demonstrating that it is still sound.

And he said that over the economic cycle as a whole, he would still be in surplus by 42bn, compared with 58bn at present.

However, David Willetts, the Shadow Work and Pensions Secretary, told BBC News that the chancellor was borrowing another 100bn off the balance-sheet.

Standing firm

The chancellor said that "we will tolerate nothing that will put that stability at risk," making it clear that the government would be standing firm in its pay dispute with the firefighters.

He said that high pay settlements - either public or private - would damage economic growth.

"We must hold firm in our discipline in pay setting across the whole economy," he said.

The worsening economic situation is one reason why Mr Brown has a tough message about the need to stand firm in the fire dispute.

The Treasury estimates that giving in to the firefighters' 40% pay demand could have a cascading effect throughout the public sector, adding at least 16bn more to the wage bill - and the deficit.

And the firefighters dispute is just one of a series of wage battles between the government and the public sector unions.

In the past, when the government got into trouble, for example over the fuel protests and the pensioners 75p increase, Mr Brown's coffers were full.

This time, the call for further belt-loosening by public sector workers may fall on deaf ears.

Still prudent?

Mr Brown is putting a brave face on his economic predicament, and hoping to keep his reputation for prudence and sound economic management.

But in truth, his options are limited.

Raising taxes further when the economy is slowing would produce howls of protest, and could risk jeopardising the recovery.

Cutting spending - when the centrepiece of the government's programme for its second term is the modernisation of the public services - would also be politically impossible.

So the chancellor will borrow the money instead, and hope that the economy will recover enough in the next two years to allow him to meet his fiscal rules.

If the borrowing is only for the short term, his 50bn cushion of accumulated surpluses built up over the past five years would allow him to weather the storm.

If it does not, it could leave Mr Brown facing a general election with tax increases, not tax cuts, to offer the electorate.

The BBC's Jenny Scott
"The Chancellor has to face up to an increasing funding gap"
Michael Howard, shadow chancellor:
"It's no use spending money if you're not getting the results that you want"

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26 Nov 02 | Science/Nature
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