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Sunday, 14 July, 2002, 15:38 GMT 16:38 UK
City fears spending 'black hole'
There are fears of higher costs and wages
Chancellor Gordon Brown must reassure business he is not "pouring money down a black hole" when he unveils the government's comprehensive spending review, economic analysts say.

An extra 90bn has been earmarked for public spending over the next three years, with ministers set to hear on Monday what their share of the cash will be.

There are fears the money will be eaten up by higher wages and costs, with public sector inflation estimated to have been running at around 6.5% despite a low overall inflation rate of about 1.7%.


It is not yet clear that [greater public spending] is leading to greater productivity

Analyst Hilary Cook

Hilary Cook, director of investment strategy at Barclays Stockbrokers, said: "The chancellor is taxing business to boost public spending but it is not yet clear that this is leading to greater productivity.

"He will have to persuade the City that he is not pouring money into a black hole and tax on business is going to be money well spent, but I feel that people are not going to believe that for some while."

In the review, the chancellor may point to the fact that Britain seems to have escaped the worst of the slowdown that has hit the United States.

'Timely boost'

John Butler, economist at HSBC, said Monday's review could give a timely lift to productivity but was unlikely to cause many surprises, given the detail that emerged at the time of the Budget.

"It could boost the economy just at the right time, but we need to see how it is going to come through, will it boost the real economy or is it going to be eaten up by wages?" he said.


Will it boost the real economy or is it going to be eaten up by wages?

Analyst John Butler

"If so it could further boost consumer spending and put some future pressure on inflation - but at the moment he thinks it will lead to higher productivity, and if so that will be good news."

Official inflation figures for June are due on Tuesday and a sharp drop in food and petrol prices should see the underlying rate drop to 1.7% from the 1.8% recorded in May.

This puts inflation close to the Bank of England's lower target of 1.5%, the point below which it needs to write an explanatory letter to Mr Brown.

However, economists believe June - which saw the World Cup and Jubilee celebrations - should represent the trough.

Opposition leaders agree

Opposition leaders have also said the government must do more to ensure the greater public spending delivers improvements in services.


We actually want to see that investment being delivered

Charles Kennedy
Lib Dem leader
Mr Brown will set out a range of performance targets and independent auditing in return for the budget increases.

Shadow chancellor Michael Howard said "real reform" of public services needed to come alongside extra cash.

He said the Conservatives would not pledge to match government funding because "a different approach" was needed in order to deliver world class health and education.

Liberal Democrat leader Charles Kennedy made similar comments.

"We actually want to see that investment being delivered," he said.

"I am not sure that the over-centralised tendencies of Gordon Brown are going to produce that."

The government's plans for future spending are published on 15 July

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14 Jul 02 | Politics
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