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Last Updated: Monday, 17 October 2005, 08:20 GMT 09:20 UK
Brown 'on thin ice with economy'
Chancellor Gordon Brown
Mr Brown may regret ignoring signs of a slowdown, the report says
Chancellor Gordon Brown is skating on thin ice when it comes to the economy, a leading forecasting group has warned.

The Ernst and Young Item Club - which uses the Treasury's own economic model to gauge the UK economy - says it will only grow at 1.6% this year.

In the last Budget, the chancellor had predicted growth of 3% to 3.5%.

The group added that Mr Brown had failed to heed signs of a slowdown, and could not blame external factors such as rising oil prices for the problem.

"The chancellor is blaming the UK economic slowdown on the recent spike in oil prices and the weakness of the European economy, but this is unrealistic," the Item Club's chief economic adviser Professor Peter Spencer said.

"These developments show just how flimsy the current budgetary framework is. Reform of the fiscal rules is long overdue
Peter Spencer, ITEM club

"The problems were plain to see at the time of last year's pre-Budget report in December, but instead of addressing them then, the Treasury chose to dress up the UK finances for the election."

"The simple fact is that he'd already run out of money this time last year," Prof Spencer told BBC Radio Five Live.

"But a prudent chancellor would keep some money in the bank so that he could do something about it."

In recent weeks Mr Brown has admitted that economic growth will not reach his target this year, although the next official growth forecast will come in November's Pre-Budget Report.

Warnings ignored

Prof Spencer added that the problem could be traced back to the housing market boom and strong consumer spending - which had propped up the economy until recently.

He argued that the chancellor had planned for the property market and consumer spending to keep the UK economy going while the world economy and exports were weak.

However, while the world economy has recovered, exports are recovering very slowly.

Those factors coupled with the recent slowdown in the housing market and the delayed impact of rising oil prices means that shoppers are now facing a "added squeeze" which will continue to weigh on the economy, said Prof Spencer.

Looking ahead, the Item Club is "cautiously predicting" a GDP rise of 2.2% for 2006, but added that this was dependent on sustained growth in the world economy and a recovery in exports and investments.

It said that this year's public borrowing figures were unlikely to be much better than last year's deficit with the chancellor thought to be facing an 11bn black hole in his accounts.

Prof Spencer also criticised Mr Brown for revising the dates of the economic cycle in order to make sure that he met his "golden rule" - that borrowing should not exceed current spending over the whole cycle.

"These developments show just how flimsy the current budgetary framework is. Reform of the fiscal rules is long overdue," he said.

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