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CBI warns of sluggish growth ahead. By Dan Martin

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20th Mar 2006
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Britain faces two years of slow economic growth, the Confederation of British Industry has warned.

Releasing its latest quarterly forecast ahead of Gordon Brown's budget announcement on Wednesday, the employers' organisation said progress will be even more lethargic unless the Chancellor cuts business taxes.

It claimed better-than-expected GDP growth in the last three months of 2005 'will not be sustained.'

According to the CBI, the economy will only pick up gradually this year and will not return to its trend rate of growth until 2007.

Calling into question the Chancellor's claims that growth will recover strongly by the end of this year, the CBI argued that the economy will improve by just 2.3% in 2006 and 2.5% in 2007.

The economy will be stifled by only a modest increase in business investment while debt burdens and limited rises in disposable incomes means consumer spending will also remain subdued, the report claimed.

CBI chief economist Ian McCafferty said: 'Our forecast is for marginally faster growth in 2006 but still pegs it below trend, with slightly better news for next year. Consumer spending power continues to be constrained by subdued wage growth as well as higher utility and council tax bills.

'More worryingly, in cash terms, government spending is set to continue running at a faster pace than GDP. More efficient private sector activity - especially business investment - is being crowded out, harming our longer-term growth prospects.'

With Gordon Brown set to announce his 2006 budget later this week, McCafferty urged him to rein in business tax to help stimulate growth.

'The budget is the Chancellor's opportunity to lift his foot a touch from the government's spending pedal and give the private sector the breathing space it needs to deliver stronger growth in the future,' he said.

McCafferty added the Bank of England also had a part to play with its interest rates decision. He claimed without a quarter point cut in the coming months growth will struggle in 2007.

The CBI's worries over the economy were backed up by a separate report from Ernst and Young.

The accountancy firm's ITEM Club, which bases its forecasts on the Treasury's model of the UK economy, said rising tax and energy bills are 'sapping the nation's spending power' bringing Brown's 'optimistic economic growth forecasts' into question.

According to the group, the tax burden ' excluding oil revenues ' will reach 37.6% of GDP this year, 37.8% in 2007 with a record high of 38.1% the following year.

Peter Spencer, chief economic advisor to the ITEM Club, said: 'It is difficult to see how the economy can put in the strong recovery seen by the Treasury's Pre Budget Report forecast while rising tax and energy bills depress spending power.'

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