FOR the Second Time in Less Than Six Months, Gordon Brown, the British Chancellor of the Exchequer, Was Last Week Forced to Admit - as Predicted in the Business - That His Forecasts for the UK Economy Were Far Too Optimistic

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FOR the second time in less than six months, Gordon Brown, the British chancellor of the exchequer, was last week forced to admit - as predicted in The Business - that his forecasts for the UK economy were far too optimistic. But he remained true to form: despite the mounting gloom, he felt able to pack his annual Budget with an array of hopelessly over-optimistic longer-term forecasts intended to show that today's setback would soon right itself and that a mini-economic boom was just round the corner.

Even after cutting this year's growth forecasts by half a percentage point to between 2% and 2.5%, for which he largely blamed poor demand for UK exports to the euro zone, the chancellor's numbers remain rosier than the private sector consensus, which foresees the economy expanding by only about 2% at most.

Even more worryingly, Brown expects growth both next year and the year after to reach between 3% and 3.5% - an increase on his previous forecast for 2005. This is an astonishingly optimistic assessment given the mounting difficulties faced by the global economy and the UK's deteriorating competitiveness; but one which conveniently allows Brown to claim that he will be able to meet his long-term commitment to fiscal probity.

The chancellor nevertheless expects combined borrowing between 2003-04 (the current fiscal year) and 2006-07 to reach pound sterling96bn (E139.2bn, $149.8bn) - far more than the pound sterling81bn estimate contained in last November's pre-Budget report.

A year ago, the chancellor said borrowing would be pound sterling11.2bn in 2002-03 and pound sterling13bn in 2003-04; last week he forecast borrowing of pound sterling24bn last year, pound sterling27bn this year and pound sterling24 next year. The final outcome is likely to be worse: most economists expect public sector net borrowing to reach up to pound sterling34bn this year, equivalent to more than 3.2% of national income and little different from the massive shortfalls seen in Germany and France, which are enduring lower growth. Some forecasters, such as Bridgewell Securities, are now predicting a pound sterling37bn deficit next year.

There can be no doubt that a dramatic change for the worse is taking place in the UK economy: the Treasury estimates that total managed government expenditure - a good measure of state spending - increased by 8% last year as Brown continues to move the British economy towards the social-democratic model of continental Europe.

The Treasury expects government spending to grow by another 8.5% this year. While total managed expenditure accounted for 37.5% of GDP in 1999-2000, the Treasury estimates this reached 40% last year and will be worth about 41.75% of GDP by 2005-06.

Lower growth is likely to mean that the government's share of total output will be much higher in a few years time and because of a change in the national accounts, these figures probably under-report the true scale of the increase by about 1.5 percentage points of GDP. Britain is edging towards the 50% of GDP the state takes in France and Germany.

The chancellor ditched his previously prudent growth forecasts back at the 2001 pre-Budget report when he increased his estimate of trend, or long-term sustainable growth, due to higher estimated net immigration. By last April, following the discovery that more people had left the country than previously believed, the chancellor turned to higher productivity to justify his higher long-term forecasts. This was even more dubious: productivity has been very poor for the past five years; given the mounting tax burden it would make more sense to cut annual long-term growth forecasts. …