BRIEFING BOOK : Britain Ponders How Best to Boost Its Fragile Economic Upturn

ISSUE: Various economic indicators in recent months suggest that Britain’s economy is on an uptick from its worst recession since World War II. The latest figures show the nation’s economy grew in the past six quarters, leading Prime Minister John Major to declare that the evidence “does show the recovery has taken root.”

But the validity of some of the economic data is questioned by the opposition Labor Party and some economists.

Also, economic specialists fear that British recovery could be dampened by recession in the rest of Europe.

Thus, Major’s Conservative government is grappling with the question of how best to strengthen what many observers say is a fragile economic upturn, and how to reduce the unemployment rate, now running at about 10.5%.

The government is running a budget deficit of about $75 billion, and Kenneth Clarke, chancellor of the exchequer, is determined to reduce it by lowering public spending and raising taxes.

Some Conservative members of Parliament and industrialists are urging the chancellor to keep higher taxes to a minimum and to cut interest rates as a way of buttressing the recovery.

* BACKGROUND: In postwar Britain, the economy has been characterized by boom-and-bust cycles, including the most recent ups and downs that marked former Prime Minister Margaret Thatcher’s 11 1/2-year reign.

In the late 1980s, the economy soared but overheated, resulting in renewed inflation and high interest rates, which helped bring about the current recession.

Since Britain is a major exporter with two-thirds of its overseas products going to continental Europe, the national economy is affected by any recession there. And the Continent has been mired in tough times for a while now.

In Britain, however, the government’s Central Statistical Office has identified what it says was the trough of its recession: the first quarter of 1992. Since then, there has been growth, but at a slower pace than the recovery from two previous recessions.

* OUTLOOK: Favorable signs show that service industries--which make up almost two-thirds of the British economy--have sparked the recovery.

Output from distribution, hotels and the food business rose strongly, reflecting continued growth in consumer spending. Business services--architects, surveyors, advertising, management consultants, computing and financial services--are also doing well.

But the weak sector of the economy is manufacturing. It shrunk in the last quarter because the recession in other European nations dampened demand for British goods.

Many business people and economists fear new taxes will stifle the recovery.

“The economy is starting to slow down,” British economist Doug McWilliams said. “The chancellor should be very cautious on tax increases.”

McWilliams said the economy has not been helped by repeated predictions that taxes would increase, particularly on home heating fuel, which would cause consumers to reduce personal spending.

Opposition Labor Party spokeswoman Harriet Harman has warned that “the chancellor must use his budget to take steps to strengthen and sustain recovery.”

* STRATEGY: Most observers believe that Clarke, in the semiannual budget to be announced Nov. 30, will try to boost the economic recovery with a mix of selected higher taxes--a political negative--to reduce the deficit; at the same time, many analysts see him reducing the discount rate--usually a political positive--possibly to 5% from the current 6%.

That strategy could appeal to businesses, which would borrow at lower rates, and to consumers seeking reduced mortgage payments to buy new homes.

That approach, however, demands fine-tuning monetary and fiscal policy. It also depends on factors outside the British government’s control--such as the actions of Germany’s central bank.

Fortunately for Britain, Germany’s Bundesbank just dropped its bellwether interest rate, which resulted in most other European countries shaving their interests rates as well.

In any event, savvy investors may want to see how the recovery fares after the budget, for, as one international economist put it, “this isn’t boom-boom Britain. It’s stagger-stagger Britain, and the wrong kind of budget could bring it to a halt.”