PSBR and jobless figures jolt hopes for the Budget

PAUL WALLACE and JOHN RENTOUL

Unemployment rose in July for the first time in two years suggesting that this may be a turning point in the jobless total, even though it still stands at 2.3 million. The rise of 1,700 came after progressively smaller declines throughout the year.

The weakness of the labour market was seen as a further sign of the slowdown and a challenge to Chancellor Kenneth Clarke's economic management. Conservative hopes for big tax cuts in the November budget were jolted by the latest figure for the public sector borrowing requirement.

The unemployment figures were immediately attacked by Labour, which claimed they "give the lie to the Government claims to have turned around the economy". The party underlined its point with figures showing that unemployment in all the constituencies of Cabinet ministers is still 56 per cent higher than when John Major became prime minister in 1990 - even though the count had fallen for 23 months before yesterday's rise.

Frank Dobson, Labour's environment spokesman, tried to put recent party dissent behind him, telling a news conference that the figures "mark the end of the silly season".

He added: "They can only add to the anxiety and insecurity of most people who have a job. They will deal a savage blow to the housing market because that depends on people being in work and feeling well off and secure."

According to Ian McCartney, a Labour employment spokes- man, the figures "indicate that the Government's much-vaunted economic recovery is no more than a dead fat cat's bounce", adapting City jargon for a feeble recovery after a precipitous fall in a market.

While the Central Statistical Office warned that the July unemployment figure was subject to a particularly large seasonal adjustment, Labour was quick to seize on the rise in the jobless count.

Launching a report estimating the annual cost of unemployment at pounds 21bn, Shadow Chief Secretary Andrew Smith said that higher unemployment "explodes the complacency of Conservative claims that the economy is healthy".

Eric Forth, the Education and Employment Minister, said, however, that unemployment figures were often erratic in the summer months as students left education. The Treasury said that this latest batch of figures sent mixed signals about the economy.

The rise in unemployment was evenly spread across the country, with only the South-west, North-west and and West Midlands bucking the trend. But there was no reduction in vacancies, which continue to run at about 180,000 at Jobcentres.

Earnings figures came in lower than had been expected at an annual rate of 3.5 per cent. Growth in manufacturing earnings fell from 4.75 per cent to 4.5 per cent.

Service sector earnings increased in June at a rate of 2.75 per cent, and the figure for May was revised down to a similar level.

With the overall figure for May also being revised down from 3.75 to 3.5 per cent, the modest rate of increase was seen by the markets as good for inflation.

The brightest news of the day was that retail sales figures in July turned out to be stronger than had been expected.

Following considerable revisions to the coverage and breakdown of the series, the volume of retail sales turned out to have been growing by more in recent months than had earlier been thought.

The implication is that consumer spending has staged a recovery after its surprise fall in the first quarter of the year.

Sales rose by 0.4 per cent in July, following a revised 0.4 per cent in June, which had previously been estimated to be flat.

This took the three-month-on-three-month growth rate to 0.7 per cent and the annual growth rate to 1.4 per cent.

However, the figures might have been affected by the warm weather, with clothing and footwear sales rising by 1.6 per cent on the month and 3.2 per cent on the year. By contrast, household goods sales were up by only 0.2 per cent on the month, reflecting the weakness of the housing market.

The public sector borrowing requirement in July was pounds 700m, which was lower than the pounds 1bn that the market had been expecting.

However, in the first four months of the current financial year, the underlying PSBR - which excludes the proceeds of privatisations - has been only pounds 1.7bn lower than it was in the equivalent period in 1994/5.

This leaves the Government a long way off the reduction of pounds 15.7bn that it has to make if it is going to achieve the objective of pounds 23.6bn set out in the Treasury's Summer Economic Forecast.

"The PSBR looks set to overshoot the Treasury's forecast by pounds 3-5bn, limiting the giveaway in November's Budget," said Michael Saunders, economist at Salomon Brothers, expressing a view which is shared by several other City analysts.

Although the Treasury cautions that revenues are erratic, a picture is emerging of lower tax receipts than had been anticipated.

Total receipts have risen by 8.6 per cent so far on the same period in 1994/5, compared with the Treasury's expectation that they would rise over the year at 10.8 per cent.

Corporation tax has risen at a particularly disappointing rate and VAT receipts have been considerably lower so far than anticipated over the full year.