Interest rates set to exceed 5%?

Interest rates set to exceed 5%?

Thursday, March 25, 2004

Interest rates could rise above 5% next year if Labour wins the next general election, warns an influential economic think-tank group.

The rises in the cost of borrowing during the past five months had failed to spark a slowdown in housing price inflation or stem consumer spending, meaning interest rates had to rise, the group said.

The Ernst and Young Item Club, who published the report, said that tax rises are also inevitable, because with government borrowing at £33bn for 2004-5, Gordon Brown potentially faces a £4 billion hole in his finances if tax revenues fall short of expectations.

Using the same forecasting model of the UK economy as the Treasury, the group says that by the end of the economic cycle in 2005-6, the tax hole could increase to £9 billion.

"The scale in the increase in the tax burden foreseen by the Treasury does pose a significant threat to longer-term growth prospects in the UK," the report said.

"Coupled with business worries about increasing regulation, it implies that incentives for enterprise and investment are being undermined."

But on the positive side the Item Club did agree with growth forecasts of three to 3.5 per cent both this year and in 2005.

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