Gordon Brown told to be prudent

GORDON Brown received a dose of his own medicine today as a leading international economics thinktank called on him to be 'prudent' to prevent Government borrowing spiralling out of control.

The Chancellor's predictions of an economic bounce were also undermined by the Organisation for Economic Cooperation and Development warning about lower growth and the lingering threat of a housing crash. It called for interest rates to be raised again to keep a lid on inflation.

The warning from the Parisbased think-tank comes just two weeks before Brown delivers his Pre-Budget Report in which he is expected to admit his arithmetic has gone badly wrong.

The OECD said that, while the Chancellor was still arguably on track to meet his 'golden rule' - that he will only borrow to invest over the economic cycle - the socalled black hole in public finances was set to worsen.

'Either an increase in taxes or a slowing in expenditure would be prudent before the end of the current cycle to ensure adherence to the broader principles of the Government's code of fiscal stability,' it said.

Economists are already warning that Brown will have to borrow about £10bn more than he has accounted for during the current financial year.

The respected National Institute of Economic and Social Research recently calculated he would have to raise taxes by the equivalent of 8p on the basic rate of income tax in order to stick to his golden rule.

The OECD said the economy would expand 1.9% this year, less than the 2.1% it predicted in April and well below the Chancellor's 2%-2.5% forecast. Next year, growth is expected to pick up to 2.7%, still a long way short of Brown's 3%-3.5% prediction.

The OECD said this month's rise in interest rates was unlikely to be the last. 'Given the pick-up in growth and the absence of slack in the labour market, monetary policy is expected to continue gradually to tighten, particularly as additional cost pressures may emerge as a delayed response to exchange rate depreciation and higher social security contributions,' it said.

The cost of borrowing is seen averaging 4.4% next year and 5% in 2005. The main risk to the outlook was a housing market crash which could trigger a collapse in consumer spending. 'This would be all the more likely if house price inflation were to continue at double digit rates well into next year,' it said.

US growth is seen rising from 2.9% this year to 4.2% in 2004. US interest rates should climb gradually from the first half of 2004.