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Last Updated: Thursday, 18 March, 2004, 14:15 GMT
City questions Budget forecasts
By Tim Fawcett
BBC News Online business reporter

Cash register
The booming economy has not put enough in the Chancellor's coffers
Gordon Brown is confident growth will reduce the fiscal deficit, but some City economists have serious doubts.

Mr Brown says the economy is strong but some analysts say worries about the global economy and UK spending could mean a future of uncertainty.

Risk from consumers spending, increased credit and soaring house prices remain.

Some economists have viewed Gordon Brown's Budget with cynicism, and Roger Bootle of Capital Economics says: "The great growth gamble goes on."

The big surprise was the chancellor chose not to raise money but to give it away.

It was just 700m, but a sure sign of confidence in his own fiscal rules.

Confidence under question

The chancellor's confidence comes after a year when his forecast for economic growth has been gloriously vindicated, says Mr Bootle.

He's basically relying on amazing revenue growth to bring the deficit lower, but it won't be enough
Michael Saunders, Citigroup

But despite the good performance the borrowing forecast has proved too low by 10 bn.

Michael Saunders of Citigroup says the chancellor is making the same error as a year ago.

Then, he said tax revenues would outpace GDP in a way that they have never done.

Personal debt worries

And borrowing has become the preserve of the consumer too.

Personal debt is at record levels. Conservative leader Michael Howard said on Wednesday that spending was being financed by borrowing to be paid for by future higher taxes.

"This is a credit card budget from a credit card Chancellor," he taunted.

Roger Bootle from Capital Economics says he is worried.

"The UK is still subject to risks from over-exuberant consumers and a highly valued housing market.

"Indeed the chancellor's forecasts included an upgrade to this very component- consumer spending."

2003/04: 37bn (up 10bn)
2004/05: 33bn (up 9bn)
2005/06: 31bn (up 8bn)
2006/7: 27bn (up 5bn)
Figures show Mr Brown's current predictions compared with his forecasts in April 2003

But it is not all gloomy in City circles. Some economists predict there could be some extra cash to pay for the country's debt if City bonuses rise after a predicted recovery of big deals.

Mergers and acquisitions are predicted to rise.

Ben Broadbent of Goldman Sachs says financial services industry forecasts are positive and should bring in more tax revenue.

"The Treasury has done a better job than most private-sector forecasters recently," he says.

"And they probably would not have made these forecasts unless they were reasonably confident."

Dollar fall

But confidence is fragile in the City against the current background of geopolitical uncertainty.

Ian McCafferty, chief economist at the Confederation of British Industry, says currency fluctuations could easily erode that confidence.

"The fall of the dollar has been orderly so far but if it were to become disorderly and seed infection into other financial markets, it would undermine confidence."

The Treasury's forecast was demanding but not unattainable
Ben Broadbent, Goldman Sachs

Meanwhile Mark Cliffe, the chief economist at ING, says the Budget is seen as bullish for sterling.

He says: "It is probably going to facilitate relatively robust growth and add pressure on the Bank of England to raise interest rates."

And that's the rub. Would higher rates cool the housing market and reduce worries over personal debt?

Or could it tip the balance leaving consumers unable to pay back what they owe?


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