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Last Updated: Wednesday, 21 March 2007, 16:38 GMT
Brown predicts strong UK economy
By Tim Weber
Business editor, BBC News website

Wind farm
The UK economy is powering ahead, says the Chancellor
The UK economy is set to grow between 2.5% and 3% during the next two years, Chancellor Gordon Brown has predicted.

This would see the UK economy grow faster than all other major economies in the world, he said.

Once again, though, he will miss his deficit target, with a 9.5bn shortfall instead of the forecast 7.9bn.

However he can point to a 11bn budget surplus at the end of the current economic cycle, meeting the "golden rule" of borrowing only to invest.

Previous economic cycles - from 1977 to 1986 and from 1986 to 1997 - had seen deficits of 140bn and 240bn respectively, the chancellor said.

Ten years of growth


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In his 11th and probably last budget as chancellor, Mr Brown highlighted his record of 10 consecutive years of growth.

"The British economy is today growing faster than all the other G7 economies - growth stronger this year than the euro area, stronger than Japan and stronger even than America," he said.

The growth rate predicted for the years from 2008, however, is slower than the 2.75% to 3.25% growth forecast for the current year.

Before 1997 the UK had been "bottom in the G7 [group of industrialised nations] for national income per head - seventh out of seven, behind Germany, Italy, France, Canada and Japan".

"Now we are second only to America and ahead of all these countries," Mr Brown said.

Borrowing trouble

If that's the best he can do when the economy is so sweet, what on earth happens when it turns sour?
Professor Peter Spencer, E&Y Item club

Yet again the chancellor had to postpone the year that his key measure of borrowing, the current balance, moves into surplus.

Mr Brown predicts that the budget deficit will fall from 2.7% of UK economic output to just 1.4% of gross domestic product in 2011/12.

That would keep the public sector net debt at just under 39%, and below the 40% limit set by the chancellor's second fiscal rule.

But given the strong performance of the economy, some economists argue that the Chancellor's fiscal position is relatively weak.

"If that's the best he can do when the economy is so sweet, what on earth happens when it turns sour," asked Professor Peter Spencer, chief economic advisor to the Ernst & Young Item club.

He had to raise his borrowing projections yet again, a move that he blamed on reduced tax revenues from North Sea oil companies.

Mr Brown did indeed deliver on his promise of avoiding an economic boom and bust - albeit during a period in which the global economic climate was relatively benign.

In fact, growth was so strong that last year he could propose to raise the "trend rate" of economic growth from 2.5% to 2.75%; that is the rate at which the UK economy can grow without running out of capacity and triggering inflation.

However, he had to cut back his tax revenue forecasts several times, which resulted in a small boom and bust in government spending.

Starting in 1997 with a few years of tight-fisted spending, when the Chancellor kept to the previous Tory government's austere budget plans, Mr Brown then pushed up government spending sharply, especially on health and education.

But the years of largesse are now over, and although government spending is still rising, to most departments the next three years will feel like a cutback.

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