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Tuesday, November 9, 1999 Published at 14:24 GMT

Business: The Economy

Economic growth swells war chest

The Chancellor is in an enviable position in his pre-Budget economic forecast.

Pre-Budget Statement

The economy this year has grown faster than expected, producing an increase in tax revenue, while the government has stuck to its tough public spending plans.

Mr Brown says that the UK economy will now grow by 1.75% this year, substantially higher than the 1.0% to 1.5% expected at the beginning of the year.

And he says that next year, in 2000, the economy will grow by between 2.5% and 3%, again 0.5% faster than he estimated earlier in the year.

His forecasts are broadly in line with those of independent analysts, who have recently increased their forecasts for the UK economy substantially. According to the Treasury's survey of independent forecasts, the UK economy will grow by 1.6% this year and 2.6% next year.

Steve Pearson of Halifax said that the financial markets were happy with the government forecasts.

"What is important in the light of the Treasury's upwards revision of trend growth is that he does not expect these higher rates of growth to be inflationary," he said.

The new forecast is above the new trend growth rate of 2.5% that the government now believes is sustainable in the longer term.

And it is in marked contrast to the pessimism that prevailed one year ago.

A year ago, when the chancellor announced his economic forecast in the midst of an international financial crisis, he was widely criticised for suggesting that the economy would grow by 1%-1.5% in 1999.

Now it is clear that, if anything, this was an underestimate.

Budget surplus

The stronger economic growth means the budget deficit forecast for this year has turned into a surplus by the end of the financial year in March.

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Further borrowing may not be necessary in the following financial year either - just before the expected date of the next General Election, and despite the previously announced cut in the basic rate of income tax.

Mr Brown says now that there will be a surplus of 3.5bn by the end of the year, rather than a deficit of 4bn.

And he forecasts another surplus in the next financial year of 3bn, compared with the 5bn deficit he forecast earlier - a net gain of 15.5bn for the public purse.

That is the size of the potential war chest that the chancellor now has to play with in advance of the next General Election.

Union leaders wasted little time in asking for some of the money to be spent on the public sector.

Rodney Bickerstaffe, general secretary of Unison, said Gordon Brown had "missed an opportunity" of putting new life into public services.

"The time is right, the economy is right for investing some of the surplus money in real improvements in health, education, transport and housing," he said.

But Mr Brown will undoubtedly be more cautious, given the higher degree of uncertainty of the public sector borrowing forecast.

Most independent forecasters estimate that there will be a budget surplus of around 2.6bn this year, slightly less than expected by the government.

The variation is even greater for the following financial year, with an average forecast of a 0.6bn budget deficit, but estimates ranging from an 8bn deficit to a 12bn surplus.

An inexact science

The reason for the uncertainty is that public borrowing is the difference between two very large numbers.

On the one hand, it is often unclear how quickly tax receipts will grow when economic growth increases.

On the other hand, this government has been more successful than most in controlling public spending. It has also benefited from a 2bn fall in social security payments thanks to lower-than-expected unemployment.

With an extra 40bn already targeted for health and education, and departmental budgets fixed for three years to 2002, the chancellor will try to avoid calls for further major public spending initiatives.

The government has set itself strict economic rules about keeping borrowing in check, but the ease with which it can meet those tests means it will have fewer qualms about using some of the surplus to soothe some areas of political sensitivity.

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