Consumers are balancing their household books rather better than the Chancellor is balancing his Budget Red Book according to the Ernst & Young Item club.

The Item Club, which is the only economic forecasting group to use the same model of the UK economy as the Treasury, forecasts property values to fall only slightly in 2005 and interest rates to stay close to their current level of 4.75%.

The Item Club's winter forecast shows the UK economy improving modestly throughout 2005 with expected GDP growth of 2.6%, driven principally by the public sector, but hitting a wall in 2006 as the government’s funding problems culminate in tax rises in next year’s Budget.

By contrast household finances remain in relatively good shape. While the forecast predicts that the number of housing transactions will fall this year, Item believe that property values will only marginally decline and high street spending will remain robust as real prices of many goods continue to fall. Interest rates will remain at or around 4.75%.

Professor Peter Spencer, chief economic adviser to the Item Club, explains, “The main risk to the UK economy does not come from a collapse in consumer confidence in 2005 but from a retrenchment in government spending, post-election.

Consumers are balancing their household books rather better than the Chancellor is balancing his Budget Red Book.”

While households have broadly kept their spending growth in line with their incomes since 2000, government spending has rapidly outpaced the increase in tax receipts. Initially, this spending was financed out of the war chest built up for the 2001 election and had the beneficial effect of supporting the economy and fending off the effects of the world recession.

However, the fiscal situation has continued to deteriorate over the last two years, despite the strength in the economy, pushing government finances into what is now an unsustainable deficit.

Nor does Item have too much faith in export growth taking up the slack. Despite a relatively strong global economy over the last three years, with even laggards like Japan benefiting from the boom, UK manufacturers have been noticeable by their absence at the party. UK exports of goods only increased by 4.4% in the twelve months to September 2004, whilst world trade grew by 11.6%.