The chancellor has revised downwards his forecast for the growth of the UK economy next year by just 0.25% - signalling that he does not believe the UK will fall into recession.

Gordon Brown said he was "cautiously optimistic" that the UK economy would weather the global slowdown much better than many other big economies.

"In the period ahead there are, of course, real risks for both Britain and the world," the chancellor said.

[It is] quite a punchy forecast. It relies very heavily on the Bank of England continuing to cut rates.

Andrew Smith of KPMG

"But it is because of the decisive action taken on monetary and fiscal policy that I remain cautiously optimistic about the prospects for the British economy."

'Escaping relatively lightly'

The change means that the UK economy is expected to grow by only 2.0% to 2.5% next year - compared with the original forecast of 2.25% to 2.75% growth in last March's budget.

Mr Brown also confirmed that he expected the economy to grow at a rate of 2.25% this year, at the bottom of his forecast range.

Brown's growth forecast

2001: 2.25% 2002: 2% - 2.5% 2003: 2.75% - 3.25%

Mr Brown has defied the economic forecasters, who are expecting the UK economy in 2002 to slow to a growth rate of 1.8%.

For the Conservatives, David Ruffley, a former adviser to Kenneth Clarke, said that the chancellor was being too optimistic.

And Liberal Democrat Treasury spokesman Matthew Taylor said "this is a complacent statement from an extraordinarily complacent Chancellor."

Mr Brown is even more optimistic for 2003, projecting the economy to grow at 2.75% to 3.25% in 2003.

The UK economy is escaping relatively lightly compared with some of the world's major economies, in contrast with previous slowdowns.

Mr Brown said that the strong public finances had given the government the flexibility to borrow money to boost the economy.

Mr Brown argued that this was because the Bank of England was able to take pre-emptive action with seven interest rate cuts, without having to worry about inflation getting out of control.

The United States, Germany and Japan - the world's three largest economies - are all likely to be in recession next year, with negative or near zero growth.

Economist Andrew Smith of KPMG said that the Chancellor was making "quite a punchy forecast".

"It relies very heavily on the Bank of England continuing to cut rates," he said.

Strong finances

Mr Brown said that the strong public finances had given the government the flexibility to borrow money to boost the economy.

He said he would be sticking to his spending plans to boost spending on health, education, and other public services over the next two years.

With total government borrowing at its lowest level since World War I, Mr Brown plans to press ahead with his plans to aid business and help pensioners and the low-paid - and provide �1bn more for the National Health Service (NHS) next year.

It will be right to devote a significantly higher share of national income to the NHS.

Gordon Brown

Shadow Chancellor Michael Howard said Mr Brown was being forced to announce policies to "clear up the mess he has himself made".

Mr Brown admitted that tax revenues were falling, but he said that his fiscal rules meant he could now afford the modest increase in net borrowing he projected.

Net borrowing is now projected to rise to �12bn next year, �10bn than previously planned, and by another �5bn more than planned to �15bn in 2003-4.

Brown's borrowing forecast

2001-2: �2.5bn 2002-3: �12bn 2003-4: �15bn

And, he told Parliament, the UK also met the Maastricht conditions for entry into the euro - if the government decided its economic tests were met.

Total debt had fallen to 31% of gross domestic product (GDP), the lowest level among major economies.

But he signalled the need for more tax revenues to fund the NHS, which was the "fairest and most efficient system" to cater to the needs of the population - but has been chronically underfunded for 50 years.

"It will be right to devote a significantly higher share of national income to the NHS," Mr Brown said.

Quick borrowing rise?

Analysts said that the chancellor's figures suggested that he was planning to spend more than previously announced.

The pre-Budget reports suggests that spending will rise by �3bn from 2004-5, with the bulk of the money in extra payments to pensioners.

"Despite the fact he has (projected) strong growth he is still borrowing more," said Danny Gabay of JP Morgan.

And Andrew Dilnot of the Institue for Fiscal Studies warned that if the government got the figures wrong, "borrowing could rise quite quickly".