Brown likely forced to cut growth predictions

THE TREASURY is considering cutting its forecast for growth in the Budget in March if figures to be published on Friday show that the economy was on the verge of recession in the final quarter of last year.

Chancellor Gordon Brown's current forecast, of growth between 1 and 1.5 per cent, is already at the upper end of the range. Many City economists consider it far too optimistic.

But the economic downturn could provoke tension between Mr Brown and Tony Blair over whether the Budget should aim to boost growth.

Mr Blair has been warned the public is rapidly losing confidence in the Government's ability to run the economy as job losses mount and Britain hovers close to recession.

Treasury insiders fear that if the forecast was trimmed to a more plausible figure of between 0.5 and 1 per cent, Downing Street would put pressure on Mr Brown to use the Budget to revive the economy. This would pose a dilemma for the Chancellor because, under his new Code for Fiscal Stability, the Government's tax and spending plans are not to be used to fine-tune the economy.

Mr Brown will already have to find extra funding for the National Health Service to safeguard services and allow a generous pay award for nurses. His spending plans, supposedly fixed for three years last July, included a reserve kitty of just pounds 1.5bn for overspending next year.

Although there is likely to be a bigger surplus in the current financial year than the pounds 2.8bn estimated in November's draft budget, it is unlikely to be as high as the pounds 10bn that some have predicted.

But recent internal research in the Treasury, to be published around the time of the Budget, will confirm that the borrowing requirement remains highly sensitive to the state of the economic cycle. This contradicts the assumption that tax revenues will stay more buoyant in a downturn than in the past.

The Treasury may be tempted to err strongly on the side of caution in the Budget to enable it to publish better borrowing figures before the next general election. However, private polling conducted by the Labour Party, which has been sent to ministers and passed to The Independent, suggests that worries about the economy are partly to blame for a decline in the Government's popularity. "The perceived weakening of the economy has had an effect on Labour's economic competence ratings," the report on the poll says.

The number of people who believe Labour "knows how to manage the economy" has fallen sharply since summer, with 48 per cent now agreeing with the proposition.

The number of people who describe the British economy as "strong" has fallen from 79 per cent in September 1997 to 62 per cent, the lowest figure since the general election. The proportion who regard it as "weak" has doubled, to 32 per cent. Women are gloomier than men, although many people's fears are based on what might happen rather than their own experience. However, the string of interest rate cuts has helped to soften the blow and to prevent greater political damage to the Government.