'Recovery' Budget will fuel inflation, economists say: Item Club expects unemployment to top 3 million by the next general election

NORMAN Lamont's 'Budget for sustained recovery' will depress economic growth, fuel inflation and result in 100,000 extra people joining the dole queue in the next three years, according to the Treasury's own computer model of the economy.

The Ernst & Young Item Club, a group of independent forecasters using the Treasury model, predicts that unemployment will be well above 3 million by the next election. It also argues that the Treasury's over-optimistic view of recovery means that Government borrowing will not fall as quickly as the Chancellor hopes.

Economists at NatWest Securities agree that more tax increases or spending cuts will be needed to bring the public sector borrowing requirement down to the Treasury's predicted levels. They expect the Chancellor to use November's 'unified Budget' to raise a further pounds 1.5bn in taxes and pounds 3.5bn in spending cuts.

If the Chancellor does decide to take further action to cut the PSBR, he may decide to compensate with a further cut in interest rates. However, a survey of 215 companies by the Pier research group found nearly two- thirds reporting that recent rate cuts had had no effect on their businesses. Just over half the services companies surveyed wanted more cuts, but fewer than 30 per cent of manufacturers.

The Item Club predicts export-led growth this year of 1.3 per cent, in line with the Treasury's Budget forecast, rising to 1.9 per cent in 1994. Item does not expect growth to be sufficient to bear down on unemployment before the next election. It forecasts that the jobless total will be over 3.4 million in 1997, well above the previous post-war peak of 3.1 million.

Item forecasts that underlying inflation - excluding mortgage interest payments - will rise above the Chancellor's 4 per cent target ceiling in the middle of next year, rising to 5.7 per cent in early 1996. This conflicts with the Chancellor's aim of bringing underlying inflation into the lower half of the 0-4 per cent range by the end of the parliament.

Hopes of achieving the inflation objective were boosted yesterday by figures from Industrial Relations Services showing that pay deals have fallen to a new low of 3 per cent, implying that industry's domestic costs remain well under control. However, despite one in five pay deals being frozen, the average increase is still above the 1.8 per cent rate of inflation.