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Tuesday, March 9, 1999 Published at 17:41 GMT

Economy on course

The UK economy is on course for low inflation and strong growth, according to the chancellor in his Budget forecast.

He kept his projection for economic growth at 1% to 1.5% in 1999, despite a sharp drop in the official growth rate at the end of 1998.

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He also projects growth of 2.25% to 2.75% in 2000, the same figures as in the government's last economic forecast in November. And he is still projecting a further increase in economic growth to 2.75% to 3.25% from 2001.

"Despite world conditions, more men and women are at work in Britain than at any time in history," Gordon Brown told the House of Commons.

The chancellor is hoping that the five successive interest rate cuts by the Bank of England, and the prospects for further reductions later in the year, will boost growth despite the worldwide economic slowdown.

Gordon Brown: Britain's fiscal position is sound today and sound in the long term
"The storms may come again. But because of what we have done, our economy is now better prepared to weather them," Mr Brown said.

But some economists warned that if growth recovered, interest rate cuts would become less likely.

"The (government's) GDP figures were pretty buoyant and if they are met the Bank of England may say 'that's enough folks,' commented Ruth Lea of the Institute of Directors.

Weathering the storms

Independent forecasters surveyed by the government suggest that growth in 1999 will only be half what ministers hope, with a consensus forecast of 0.6% growth in GDP (Gross Domestic Product). But they do agree that any slowdown will be short-lived, with growth recovering to 1.8% the following year.

The International Monetary Fund, which has just reviewed the prospects for the UK economy, has also downgraded its economic forecast for this year to 0.8%, while generally praising the government's economic management.

Recent surveys of business opinion, and the latest retail sales figures, do suggest that the economy is recovering from its low point late last year.

Sound public finances

The chancellor expects inflation to stay at the government's target of 2.5% for the next three years.

"With public investment set to rise and interest rates coming down, both at precisely the right time in the economic cycle, Britain's fiscal and monetary policies are working together to promote growth with low inflation," he said.

Public finances are also in good shape, according to the chancellor.

The government inherited a deficit of some 28bn, but this year there would be a net repayment of 1bn.

In the next five years, the current budget surplus would amount to 34bn.

That would reduce the government debt to 37% of the total economy by 2001-2002, compared to 41% in this financial year.

The government would be able to meet all its fiscal rules, including the so-called golden rule, under which the government borrows only to invest.

That would ensure the government's plans to spend 40bn more on health and education, and still leave room for tax cuts.

This year public services will receive 1bn in extra capital spending, while tax cuts will total 3bn.

Andrew Milligan, economic adviser to the insurance group CGU, said: "We've got a 6bn tax giveaway. It comes over three years but it is still more than many people expected."

Overall, however, the government is only giving a modest further boost to the economy. All the tax changes taken together, will cost the Exchequer 1bn in 1999/2000, 1.385bn in 2000/2001, and 3.5bn in 2001/2002.

That is because the abolition of allowances like mortgage interest tax relief and the married couples allowance, and the rise in petrol duties, nearly balance out the headline tax cuts and benefits for families.

Overall, the tax burden will stabilise at around 37% of GDP, after rising steadily for the last four years - part of the strategy of putting the public finances on a sound basis.

The government's finances are also benefiting from lower interest rates and less spending than expected on social securitiy payments.

But if economic growth slows for several years, this could put all the government's figures off-course. Some forecasts suggests that the fiscal surpluses could then quickly disappear, and the government would need to raise taxes or cut back on its spending plans.

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