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Monday, November 8, 1999 Published at 07:28 GMT

Business: The Economy

Growth estimate raised

Treasury: Higher growth rate does not mean more public spending

UK Chancellor Gordon Brown is refusing to relax his tight grip on public spending, even though the Treasury has raised its estimate of the economy's rate of growth.

The Treasury's long-term forecast rate is being increased to 2.5%, with the chancellor believing that the economy now has the potential to grow slightly faster over the next five years than the 2.25% he had been assuming.

But Mr Brown is telling ministers they must still make their bids for revised departmental budgets on the basis of the lower figure.

The chancellor says he is determined to end the boom and bust cycles and create a stable low-inflation economy and that he will never ease strict controls on public spending.

But some analysts have argued that a rising level of growth, combined with tight government expenditure, will give the chancellor billions of pounds to spend in the run-up to the next general election.

Mr Brown says it is prudent to stick with the lower growth forecast until the higher figure can be confirmed, and that he will not spend money he has not yet got.

If growth does increase as forecast, the additional tax revenues are expected to boost the Treasury's coffers by 6bn.

The Conservatives had themselves raised the forecast for trend growth - that which can be sustained without triggering inflation - to 2.5% a year during the last parliament, only to see it cut to 2.25% by Labour when the party came to power in 1997.

Treasury cautious

A Treasury spokesman said: "We will continue to base our fiscal assumptions on 2.25% to ensure the forecasts are done on a prudent basis."

He added that the lower rate would be adhered to at least for Tuesday's pre-Budget report, the Budget and the three-year spending programme to be worked out next summer.

Estimates of economic growth are crucial for governments when they do projections of how much they are going to spend on public services and welfare and receive in tax income.

The Treasury says it expects higher growth because demographic trends mean the workforce will expand in the coming years and overall rates of employment will rise from current levels, allowing greater total output.

Currently the Treasury is assuming productivity growth will remain at the 2.1% current average figure but it believes that could well be exceeded as high levels of business investment in recent years feeds through into higher output per worker.

The spokesman said: "There are considerable upside risks to our growth forecast. We see the 2.5% figure as a neutral level but we do expect there could also be rises in productivity and so a trend rate of 2.75% could be possible."

Treasury officials believe previous governments, particularly in the mid-1980s, mistook "cyclical" rises in growth for a fundamental shift to a higher level.

This, they say, very quickly wrecked the public finances when the economy turned down, swinging from record surpluses to record deficits within a very few years.

"Just because we are seeing an apparent improvement in the figures, it would be imprudent to assume the structural improvement has already happened. We would want much more evidence," said another Treasury official.

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