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Thursday, 22 November, 2001, 00:10 GMT
The chancellor's choices
Gordon Brown faces serious budget choices this year
Dharshini David

As the global economy takes a turn for the worse, the BBC's Dharshini David considers the pressures on Chancellor Gordon Brown as he prepares to reveal his pre-Budget Report.

For the last four years, UK Chancellor Gordon Brown has been overseeing an economy that would have been the envy of many of his predecessors.

The longest period of continuous growth since the war, record employment, a bulging public purse - all combined with low inflation.

Gordon Brown: will his luck hold?
Gordon Brown: will his luck hold?
Is that golden age now a thing of the past?

When the chancellor stood up on Budget day in March, the signs of strain in the global economy were already starting to appear, particularly in Germany and Japan.

But, with domestic spending remaining strong, Mr Brown claimed that the UK economy would not stray from its path of expansion.

He expected the economy to grow by between 2.25% and 2.75% - close to its long-term average.

Global slowdown

However, much has changed in the intervening eight months.

Profits warnings have escalated in the US, suggesting that the gloom has intensified.

The UK may have the strongest growth among all the major industrial countries.

Stock markets plunged, firms cut back on investment and jobs were shed.

The misery started to creep across the Atlantic to the eurozone - the German economy may also have ground to a halt.

The US, the world's largest economy, is now almost certain to have entered recession - and is likely to have done so even if the events of 11 September had not taken place.

The impact of US terrorist attacks and their aftermath on the economy will be hard to measure for some time, but they are likely to make the downturn longer and perhaps deeper.

Impact on UK

What does this mean for the UK - and the chancellor?

As Mr Brown predicted, strong consumer spending has so far partly insulated the UK economy from the global downturn.

Even if the economy grinds to halt in the final three months of the year, it is still likely to have grown by just over 2% in 2001 as a whole.

That is only a shade below the chancellor's forecast.

But the problem is what happens next year.

If, as could be the case, unemployment is rising, fears about job security could mean that consumer spending dries up.

That poses the biggest risk to a further slowdown.

With seven interest rate cuts this year, and 7bn of extra public spending in the pipeline, the economy should be poised to avoid a full blown recession.

But the chancellor is almost certain to revise down his forecast for 2002 growth, currently at 2.25% to 2.75%.

The question is by how much.

A range of 2% to 2.5% might be viewed as too optimistic.

Anything below 1.5% might start financial markets panicking, and prompt fears of a recession.

Experts think he is likely to come out with a range of 1.5% to 2%.

That would signify a slowdown rather than a recession - and would probably still mean that the UK had among the strongest growth records of any major industrial countries.

Pressure on public finances

What would this mean for the public finances?

For the first time since Mr Brown became chancellor, they are likely to perform less well than predicted.

A downturn is bad news for the public purse.

Lower corporate profits, incomes and spending tends to hurt the tax take.

And the need to pay more benefits tends to bump up spending.

But the damage caused by the slowdown should not be too great.

Economists think that the public finance numbers could look 2bn or 3bn worse than predicted in the March Budget, when Mr Brown estimated a 3bn deficit for the year.

And as long as the downturn is not prolonged, that should not pose too much of a problem for the chancellor's spending plans in the next few years.

Long term stability

For the long term, the chancellor is likely to emphasise that the economy should return to a path of steady growth within a couple of years.

Of course, the risks of a sharper downturn remain. And Mr Brown may not necessarily be better than an independent economist at crystal ball gazing.

But he has got a better reason than most to hope that the UK weathers the current economic storm.

If it does, he may be remembered as not only a prudent chancellor, but the one who helped to keep the UK economy on its feet while the US economy plunged into the red - an almost unheard of achievement.

See also:

16 Oct 01 | Business
Brown and the downturn
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