Brown to trumpet growth

Surprisingly strong economic growth has restored British Finance Minister Gordon Brown's reputation for financial management 12 months after he had to slash growth forecasts and ramp up borrowing projections.

Indeed, Mr Brown can boast a number of successes when he presents his 10th and probably last pre-budget report on Wednesday.

According to a pre-budget UK poll, Mr Brown will probably stick with his current growth predictions for 2007 and 2008, but may raise forecasts for growth and borrowing this year.

Growth is set to exceed even the top end of the government's forecast range, employment is at record levels, business investment is rising, and corporate tax receipts are gushing into government coffers.

This bodes well for Mr Brown's ambition to take over as Prime Minister from Tony Blair next year. The gloss looked to be coming off the long-serving finance minister's record last year when the economy recorded its worst growth since the slump of the 1990s.

"Growth this year has surprised not just the Treasury but most economic forecasters," said Paul Dales at Capital Economics. Powered by a new surge in the housing market, strong recovery in continental Europe and generous government spending, Britain's economy looks set to expand by 2.6 per cent this year, above the 2.0-2.5 per cent range predicted in the March budget.

Stronger growth has also had a positive impact on the public finances and this year's pre-budget report looks set to be the first in six years that has not required Mr Brown to revise down his forecasts for government receipts.

Britain has so far weathered record oil prices and avoided a housing market crash, but there are risks on the horizon. A slowing US economy is probably the biggest but higher borrowing costs could also hit Britain's highly indebted consumers.

The pound's strength on the foreign exchanges also poses a threat to the country's recently-improved export performance. Sterling has risen to a 14-year high against the dollar, an eight-year high against the Japanese yen and a six-year high in trade-weighted terms.

Mr Brown's central forecasts are for growth of three per cent over the next two years, a rate considered optimistic by most economists.

"(Brown) is likely to make much of the improvement in this year's growth outlook but there are risk that government forecasts for the next two years are too high," said Philip Shaw, chief economist at Investec.

Government revenues so far this year have been slightly stronger than forecast in the budget. Mr Brown has had a harder time making good his pledge to rein in public spending after loosening the purse strings for the past four years.

Mr Brown has pledged to put an even firmer lid on spending in the coming years and - if he is to meet his fiscal rules - spending must now rise at a slower rate than overall economic growth.

The government may get some leeway because a growing pool of migrant workers means the economy can grow faster without spurring inflation.

Still, fiscal policy is likely to be less supportive of growth going forward and Mr Brown's future forecasts look challenging.

"Our analysis of the public finances suggests trouble is brewing," said David Hillier, chief UK economist at Barclays Capital.