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Last Updated: Sunday, 24 July 2005, 23:16 GMT 00:16 UK
Tax rises 'unlikely before 2007'
A purse
Consumes lack the cash and confidence to pay more taxes
The UK economy is facing a bleak outlook with growth set to fall to just 2.1% this year, a study has said.

The Ernst & Young Item Club said the economy's weakness meant tax rises - to plug gaps in government spending plans - were unlikely for at least two years.

It said tax hikes would have to be put off until 2007 because UK consumers are too short of cash.

An interest-rate cut next month would not be enough to raise consumer confidence to allow tax rises in 2006.

The body also added that there is an "economic imbalance" in the UK at present.

High Street weak

We cannot keep propping up the UK economy by cutting interest rates, stimulating consumption and deferring tax increases
Peter Spencer, Item Club

It said the High Street would be unlikely to make much of a contribution to growth until Christmas.

The Item Club warned that the current imbalance in the UK economy had reached a "critical stage", with Mr Brown facing a 15bn ($26.09bn) savings deficit.

It said a strong pound, making British goods expensive abroad, and weak investment had contributed to an "anaemic performance" over the past 18 months that had surprised even the Item Club.

"Quite simply, we cannot keep propping up the UK economy by cutting interest rates, stimulating consumption and deferring tax increases," said Peter Spencer, chief economic adviser to the Item Club.

The group's report follows Office for National Statistics data showing that gross domestic product - a measure of economic health - grew by only 0.4% between April and June.

Year-on-year this represented growth of only 1.7%, well below the chancellor's forecast of 3% to 3.5% economic growth for this year.

Consumer factor

However, the club predicted that Mr Brown's decision to bring forward the start date of the current economic cycle should enable him to meet his Golden Rule of only borrowing to invest.

But it said he would start the next cycle in "serious structural deficit".

The club concluded that the outlook was more encouraging for consumers than for public sector finances.

"The prospects for the consumer remain fundamentally sound, particularly as the housing market stabilises and the chancellor postpones tax hikes until 2007," said Mr Spencer.

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