Promised tax rises cloud revival in consumer confidence: Spending surge continues but inflation and unemployment forecasts dampen prospects for recovery

HIGH STREET spending volume rose to a record in February, but some City economists are worried that the revival of recent months could be derailed if the announcement of tax increases in the Budget damages consumer confidence.

The computer model that Treasury economists use to advise the Chancellor suggests that the Budget measures will start to weaken economic recovery almost immediately, despite the Chancellor's stated aim to boost business in the coming year before taxes rise significantly.

The Treasury model suggests that the measures in the Budget will directly result in more than 200,000 extra people joining the dole queue by 1996, by which time unemployment will have topped 3.5 million. The Budget will also increase inflation, pushing it above the Government's target ceiling by this autumn. Consumer spending will also be depressed, according to the independent Ernst & Young Item Club.

But consumer spending seems relatively buoyant for now. Retail sales volume rose by 0.2 per cent in February, according to the Central Statistical Office.

The CSO also increased its estimate of January's rise in retail sales to 2.2 per cent, the largest since the rush to beat the VAT increase in the 1991 Budget. The British Retail Consortium said sales appeared to be holding up well so far in March.

High-street spending volume in the three months to February was 1.8 per cent higher than a year earlier. Retail sales have been rising gradually since last spring, and have now made up all the ground lost in the recession.

Ian Shepherdson, economist at Midland Global Markets, said food sales were likely to fall back in the coming months and that 'no one knows how much the Budget will depress confidence'.

The improvement was welcomed by the Treasury, with the Chancellor damping down hopes of an early interest rate cut by arguing that their current level was consistent with recovery. Fading hopes of an early reduction helped the pound to climb by 1.38 pfennigs to close at DM2.4125.

But rate-cut speculation may be rekindled if the Bundesbank reduces German interest rates at today's policy-making council meeting.

Pessimism on interest rates also helped to depress the stock market, although the main reason for the fall in share prices was the reform in advance corporation tax in the Budget. This makes shares less attractive to institutional investors which are not liable for tax, such as pension funds. The FT-SE 100 index closed 29.4 points lower at 2,889.9. Gilt prices recovered some of Tuesday afternoon's fall, with longs up around pounds 3/8 and mediums up about pounds 1/4 .

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