Clarke should raise 'extra 4bn' pounds

KENNETH CLARKE should raise an extra pounds 3bn- pounds 4bn from tax increases or spending cuts in the Budget and sweeten the pill with a half- point cut in interest rates, according to one of Britain's leading economic forecasting groups, writes Robert Chote.

The London Business School predicts recovery will continue 'at a relatively sluggish rate', held back by Europe. It predicts 1.6 per cent growth in national output this year followed by 2.5 per cent next year.

The LBS forecast assumes that the Chancellor raises an extra pounds 1bn in the Budget by increasing indirect taxes on spending more than would be necessary to keep pace with inflation. One of the authors of the forecast is Professor David Currie, one of the 'wise men' who advise the Chancellor on the economy.

Tightening tax and spending policy and loosening interest rates would ease government borrowing, reduce consumer spending and help maintain a competitive level for the boost without fuelling inflation, the LBS argues. The Government's spending control total could be cut by pounds 2bn- pounds 3bn to reflect lower inflation and control of public sector pay.

The LBS argues that inflation has passed its trough, but that the underlying measure will remain 'at or close to' the Treasury's 4 per cent target ceiling. Keeping inflation within target will require higher interest rates next year, with base rates climbing to 7 per cent by the year-end.