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Last Updated: Wednesday, 6 December 2006, 14:34 GMT
Brown hails a strong UK economy
Chancellor Gordon Brown
Growth 2006/7: 2.75%
Growth 2007/8: 3%
Deficit 2006/7: 8bn
Deficit 2007/8: 1bn

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The UK economy is set to grow by 2.75% this year, well above Chancellor Gordon Brown's original prediction.

The rate of economic growth would be even stronger, at about 3% during the next two years, the chancellor said in his annual pre-Budget report.

Mr Brown said the government's policies had brought low inflation, with growing exports and investment.

While his 2006 forecast is in line with that of most experts, his numbers for 2007 are well above the 2.4% consensus.

In March this year, the chancellor had suggested that the UK economy would grow just 2.25% over this year.

The chancellor also revised next year's so-called trend rate of growth, raising it by a quarter of a percentage point to 2.75%. This suggests that the Treasury believes the UK economy has plenty of headroom left.

Mr Brown said the government could now point to 10 years of economic growth, the longest post-war period of growth in any country.

The numbers are a turnaround for the UK economy after a setback in 2005, when it grew just 1.8% - well below the chancellor's forecast of a growth rate of 3 to 3.5%, made in his 2005 Budget speech.

Economic uncertainties

The UK economy and the government's tax receipts have been boosted massively in recent year by immigrants, especially from Eastern Europe, according to economists of the Ernst & Young ITEM club.

The chief economic advisor of the ITEM club, Peter Spencer, said that these growth figures were "achievable", but warned the downside risks were "very high - the High Street is delicate and the US economy fragile".

Andrew Smith, chief economist at accountants KPMG, warned that slower global growth and the stronger pound would act as a drag on exports.

"With consumers constrained by higher energy and mortgage costs, it is questionable whether growth will accelerate as the chancellor hopes," Mr Smith said.

The Conservatives said the UK economy had actually underperformed under Mr Brown.

Shadow chancellor George Osborne said Mr Brown had "buried" the fact that he had downgraded his growth forecast for 2008.

The chancellor's budget would leave the UK with the largest structural deficit of any major European economy, he added.

In a dossier published ahead of the pre-Budget report, Mr Osborne had said Britain's performance on growth, unemployment, tax increases, budget deficits and productivity was lagging that of other industrialised nations.

Debt targets

In his pre-Budget report, Mr Brown had to row back slightly on his forecast on government borrowing.

The UK has no choice but to outperform and out-innovate our competitors
Gordon Brown

His original prediction of turning a 7bn shortfall this year into a 1bn budget surplus in the next financial year is unlikely to come true.

The chancellor now says there will be a 8bn budget deficit this year, which will be reduced to a 1bn shortfall in 2007-8.

However, he predicted government finances would steadily move into surplus in following years, growing steadily to an annual surplus of 14bn by 2011. This return to surplus is one year later than he had predicted in March this year.

John Hawksworth, of accountancy firm PricewaterhouseCoopers, said the chancellor had "made only small upward revisions to his public borrowing forecasts for this year and the next two years, but to achieve this will require much tighter public spending control".

Mr Brown also said the UK would meet his self-imposed "golden rule" on borrowing, which says that over a full economic cycle, the government should only borrow to invest.

In his speech, Mr Brown moved the end of the current cycle forward - to 2007 instead of 2008 - allowing him to say that over the full cycle, he will be 8bn in surplus.

The current cycle started in the financial year 1997-8 and is now due to end in 2007-8.

Global challenges

In his pre-Budget report, Mr Brown also returned to one of his favourite themes, the impact of globalisation on the UK economy.

Asia was "already out-producing Europe", Mr Brown said, pointing to the fact that China was "manufacturing half the world's computers, half the world's clothes, more than half the world's digital electronics and this Christmas, more than 75% of children's toys".

Given these challenges, the UK had "no choice but to outperform and out-innovate our competitors".

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