Brown warned over public spending

Gordon Brown prides himself on his "prudence"

The International Monetary Fund (IMF) has warned Chancellor Gordon Brown against running up a budget deficit to finance public spending increases.

In its latest world outlook report the IMF says the government's policies could be contributing to the high value of sterling.

The rise has been blamed by exporters for making their products uncompetitive abroad.

It would be better to avoid returning to a budget deficit, so as not to reduce the pool of national savings available for private investment.

IMF report

Earlier this week the European Commission also warned the UK Government not to go beyond its planned balance of spending to national income.

Ironically the Whitehall spending watchdog, the National Audit Office, published on Friday a report which criticised the European Commission itself for failing to tackle fraud and mismanagement.

The IMF's criticisms will add fuel to the debate about the economy - likely to be a key issue at the General Election.

Pressure on sterling

Earlier this week Tory leader William Hague accused Mr Brown of being "imprudent" and said the healthy state of the economy was due to luck rather than the chancellor's skill.

The IMF report says: "While this expansion (in public spending) most likely can be accommodated without overheating, it could contribute to a policy mix that may tend to keep sterling elevated.

"Over the medium term, the large planned increase in public investment in infrastructure and human capital should help to raise productivity growth.

I am not prepared for the European Commission to give us lectures about what the level of spending should be in this country

Gordon Brown

"However it would be better to avoid returning to a budget deficit, so as not to reduce the pool of national savings available for private investment."

Although the public finances recorded another big surplus last year - more than £16bn - the Budget is set to return to the red in 2002-03, with the deficit reaching £12bn by 2005-06, according to the Treasury's own forecasts.

Angry response

The European Commission has warned the government to cap public spending, drawing an angry response from Mr Brown.

He told BBC Radio 4's Today programme: "I am not prepared for the European Commission to give us lectures about what the level of spending should be in this country.

"Our public investment plans will go ahead".

In its report the IMF slightly revised down its forecast for UK economic growth this year, from 2.8% to 2.6%.

However the new estimate - which was leaked earlier this week - is still comfortably within the Treasury's forecast range of 2.25% to 2.75%.

The report cautioned that the balance of risks had "tilted downward", with the UK economy more vulnerable to world financial events than those EU states which had joined the euro.