Ernst & Young say economy will overspend

According to a study by The Ernst & Young Item Club, the weakness of the UK economy means that tax rises to support government spending, will have to be deferred until 2007.

UK economic growth is expected to fall to 2.1% this year. An interest-rate cut next month is not expected to raise consumer confidence enough to allow tax rises in 2006.

The study highlighted a critical economic imbalance in the UK, with the High Street unlikely to make a significant contribution to growth until Christmas and the chancellor, Gordon Brown, facing a £15bn savings deficit.

A strong pound, making British goods expensive abroad, and weak investment had contributed to a poor performance over the past 18 months.

Peter Spencer, chief economic adviser to the Item Club said: “Quite simply, we cannot keep propping up the UK economy by cutting interest rates, stimulating consumption and deferring tax increases”.

The group’s report followed new figures from the Office for National Statistics showing that gross domestic product grew by only 0.4% between April and June. Year-on-year this represented growth of only 1.7%, significantly lower than an expected 3% to 3.5% economic growth for this year.

The Item Club did predict, however, that Mr Brown’s decision to bring forward the start date of the current economic cycle should help him meet his Golden Rule of only borrowing to invest, although it expects the next cycle to start in serious structural deficit.

The study concluded that the outlook for consumers was fundamentally sound, despite concerns about public sector finances.