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Monday, 21 May, 2001, 07:56 GMT
Managing the economy

The UK economy has put in a strong performance since 1997 when Labour came to power - although its recovery started under the Conservatives.


PROSPECTS FOR GROWTH

Labour has sought to ensure that it would get high marks for managing the economy from independent analysts, reversing one of the key credibility gaps the party had suffered in relation to the Conservatives in the 1970s and 1980s.

The UK economy has put in a strong performance since 1997 when Labour came to power - although its recovery started under the Conservatives.

Unlike some previous Labour governments, there has been no major economic or currency crisis to derail plans and the economy weathered the world financial crisis in 1998 without too much damage.

As a result, inflation and unemployment are low, interest rates have been cut and the public finances are in a healthy state.

However, the world economy now faces an uncertain time.

A global slowdown, led by the United States, could cut the rate of economic growth and cause unemployment to rise.

And a sharp fall in the value of the pound, especially against the euro, could boost inflation - especially if the trade gap continues to widen.

But most economists believe that a series of interest rate cuts by the Bank of England - the latest of which happened on 10 May, bringing rates down to 5.25% - could keep the economy from falling into a recession.


ENDING BOOM AND BUST?

The UK economy has been enjoying an unprecedented period of economic growth, growing steadily since 1992 when the last recession ended.

The manufacturing sector, however, has not been so buoyant, as the strong pound has affected the export sector, notably cars and steel. However, so far UK exports to Europe have been strong, and that has narrowed the trade gap with the countries that have adopted the euro.

There are increasing concerns about the rate of economic growth this year, with the economy growing in the first three months of the year at only half the rate that it grew in 2000.

Most economists expect growth to fall back to around 2.5% next year, compared to 3% last year - although it is less clear whether Labour has succeeded in raising the long-term growth potential of the economy.

If it has, through boosting productivity, then there would be the prospect of a long-term increase in growth rates and living standards.


CHANCELLOR'S WAR CHEST


As a result of strong economic growth, and several years of public spending restraint, the public finances are in a strong state.

The government had a budget surplus on its current account of around 15bn this year, around 5bn more than it planned for.

The government has introduced a new set of rules to ensure financial discipline:

  • The "golden rule" limits current spending (excluding government investment) so that it balances over the economic cycle.
  • Overall government debt should stay below 40% of the total economy (GDP).

    These economic tests are being met, despite increasing public spending over the next few years.

    However, the Conservative Party is critical of the government's financial framework.

    It says that it is not strict enough and has voiced concerns that public spending is planned to rise at a faster rate than the overall growth of the economy.

    Shadow Chancellor Michael Portillo has said that he would like overall spending to rise by no more than the overall growth rate of the economy (around 2.5% annually) - but has promised to meet many of Labour's spending commitments.


    PRICE STABILITY


    One of the biggest policy changes made by the incoming Labour government was to give the Bank of England independence to manage interest rates.

    The Bank's Monetary Policy Committee (MPC), appointed by the government, meets monthly to consider whether to raise or lower interest rates.

    Under this system, interest rates have recently been cut to 5.25%, leading to lower rates for those with mortgages. Inflation has stayed well below the target for nearly two years.

    The latest inflation figure for April, excluding mortgage interest payments, was 2.0%.

    However, the government set the inflation target which the Bank aims to meet - a target which excludes mortgage interest rates.

    It is currently 2.5%, and it is "symmetrical" - the Bank is expected to take action if inflation is too low as well as too high.

    Inflation has been under that target for nearly two years - leading some Conservatives to call for a lower target of 2% inflation.

    Gordon Brown says that would lead to interest rate rises and job losses.

    The government appoints the four independent members of the nine-member MPC to relatively short two-year terms.

    Both opposition parties would like to change this appointments system, to make it more transparent and (in the case of the Conservatives) to extend the term of office to provide a buffer against political pressure.

    The Conservatives would also like independent economic advisors to evaluate the government's spending plans and economic forecast.


    EMPLOYMENT


    Labour claims that under its stewardship of the economy, the number of people claiming unemployment benefit has fallen to under 1m, compared to nearly 3m during the early 1990s - the best level for 25 years.

    The overall rate is also at a record low of 3.3%, not seen in the UK since the 1970s.

    In April, the claimant count of the number of unemployed fell to 975,000.

    However, the fall began under the Conservatives and the rate of decline has been slowing.

    And the fall in the numbers claiming benefit has been faster than the fall in the broader measures of unemployment.

    The fall in the so-called claimant count may have been faster because of the introduction of Labour measures such as the New Deal, which took many young people off benefits.

    And there is also the issue of regional unemployment, which has remained stubbornly high.

    While unemployment rates in some areas of the South East are below 2%, regions once dominated by the manufacturing sector - such as the North East - have much higher rates, especially among older men.

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