Growth stutter triggers tax fears

DOWNBEAT news will today raise further questions about the strength of the economic rebound.

The quarterly report from the British Chambers of Commerce says manufacturing and services are weaker than they were for most of last year and business confidence remains low.

And the closely-watched ITEM Club survey has cut its forecasts for economic growth, raising the likelihood that Gordon Brown will have to increase taxes yet again. ITEM uses the same economic model as the Treasury.

'There is no sign of a sustainable recovery,' says Chambers of Commerce director general David Frost.

Although the second quarter saw improvement after the dire first three months of the year, which were overshadowed by the looming war in Iraq, the rebound has been weak. Home orders were at five-year lows. Struggling against cheap Asian competition and a sluggish global economy, manufacturers cut jobs and expect to axe more.

Frost called for the Chancellor to boost the economy by slashing red tape on businesses. The BCC survey covers 5,720 companies employing 600,000 people.

The Ernst & Young ITEM Club said the economy is 'stuck in first gear' as it cut this year's growth forecast from 2% to 1.7%, rising to 2.5% in 2003. That is well below Brown's Budget forecasts for 2% to 2.5% this year, 3% to 3.5% next.

With government spending rocketing, only much faster economic growth can prevent yet more tax rises. ITEM predicts that government borrowing will hit £31bn this year and £30bn in 2003, despite the April increase in National Insurance contributions.

Brown is warning Ministers to restrain spending growth.

Unless the housing market collapses, ITEM believes the Bank of England's latest interest rate cut will be its last. The Bank, under new governor Mervyn King, surprised the market two weeks ago by cutting rates by 0.25% to 3.5%.

Mortgage lenders grudgingly followed suit. But longer-term lending rates have soared, threatening an eventual rise in mortgage costs. This imperils the boom in mortgage equity withdrawal. The cycle of rising prices and cheaper debt has powered consumer spending through three years of a downturn.

Property website Rightmove says house price rises overall slowed in July for the seventh month in a row. The annual house price inflation rate fell to 13.2% - half January's 26.5% level.