Economy is heading for a slowdown, Chancellor is set to warn

Last updated at 11:03 05 October 2007

Chancellor Alistair Darling is expected to admit next week that the UK economy will grow by less than previously forecast in 2008.

Mr Darling signalled the likely downgrade after telling the Financial Times that the recent credit squeeze, sparked by defaults on US sub-prime mortgages, would have "some effect" on the UK economy.

The 2.5% to 3% growth range pencilled in by former Chancellor Gordon Brown could be trimmed to 2% to 2.5%, experts said.

Most economists are predicting growth of 2.2% in 2008 so will be unsurprised by Mr Darling's likely revision, expected in a Pre-Budget Report statement next week.

Economists said the downgrade would put Government borrowing targets under more pressure and could tie ministers' hands over vote-winning give-aways ahead of any snap election.

Mr Darling told the FT that the crisis, which prompted September's run on mortgage lender Northern Rock, would "undoubtedly" have an effect on Britain.

He added: "If you look at the consensus of the economic forecasters, it would be prudent to assume that (the credit squeeze) will have some effect on us here."

Investec chief economist Philip Shaw said: "We've been sceptical over the strength of the Treasury's forecast for some time, and given the credit squeeze there are even more downside risks.

"The Chancellor is picking up the reins of the economy at a difficult juncture."

A slowing UK economy would also make it more difficult for Mr Darling to meet his borrowing target of £34 billion in the current financial year as tax revenues and spending fall.

Global Insight UK economist Howard Archer said: "He has two choices basically. He can either take corrective action to meet the targets, or assume that they will be missed a little bit.

"In an election, the last thing he will want to do is announce that he is going to put taxes up or cut spending."

He added: "What he might do is raise his borrowing estimates marginally, saying it is due to circumstances beyond his control. But it is going to make life a bit difficult for him to offer any sweeteners before the election."

Mr Darling said he was "ready" to deliver the Pre-Budget Report and Comprehensive Spending Review "whenever", although it is now widely expected to be delivered when the House of Commons returns from the summer recess on Monday.

The paper went on to say that Mr Darling had said his three-year public spending statement projects growth of 1.9% above inflation, with generous settlements for health and education.

The Chancellor also delivered a warning that public sector pay awards had to be kept under control.

Lessons from the recent Northern Rock crisis had to be learned and he would look at "boundaries" between the Treasury, the Bank of England and the Financial Services Authority (FSA).

Northern Rock's woes will be back in the spotlight next week as the FSA faces questions over its handling of the crisis from MPs on the Treasury Select Committee.

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