A Budget That Will Tax Brown; CITY EDITOR WILLIAM KAY PREDICTS A TOUGH YEAR AHEAD AS THE ECONOMY STRUGGLES

The Mail on Sunday (London, England), January 3, 1999 | Go to article overview

A Budget That Will Tax Brown; CITY EDITOR WILLIAM KAY PREDICTS A TOUGH YEAR AHEAD AS THE ECONOMY STRUGGLES


Byline: WILLIAM KAY

WHEN Chancellor Gordon Brown steps up to the Dispatch Box to deliver his Budget speech in the spring, he will face one of the most difficult tests of his political life.

He must frame his Budget against an economic background in which unemployment is rising, inflation and interest rates are falling, consumers are virtually on strike and retailers are begging for mercy.

For Brown, this means that his tax revenues are melting while his social security and unemployment bills are exploding.

Business confidence will not be helped by the introduction of the euro, the new European currency in which market trading begins tomorrow. Anything could happen in the early stages.

Although the millennium bug is year away, it will begin to throw up problems from now. Many business contracts are renewed annually, so the dreaded '00' will begin to appear on computer files. Many computer pro- grams written before 1990 referred to years by their last two digits . So when 1999 becomes 2000, those programs will read it as 00 and go backwards.

Bug fears, rather than the problem itself, will increasingly inhibit business.

Third World exporters, importers, banks, airports and airlines will suffer until they can prove they are bug-free.

Consumers will be 1999's great enigma. If they return to the shops the outlook will be bright. But if, as many predict, they stay at home until well into the first year of the new millennium, then we are heading for recession.

That has led City economists to slash their growth forecasts from 2.3% to as low as a quarter or a third of one per cent. 'This decline will mean periods of zero or negative growth during the year,' says David Rough, group investment director at insurer Legal & General Group.

Tumbling prices for raw materials are one reason why several City investment houses are forecasting

that inflation will fall from 2.5% to 1.5% or less.

The Bank of England will cut interest rates from 6.25% to about 5% this year, but on its own that may not be enough to turn things round.

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