The British government expects the economic downturn next year to be shallow and shortlived, with a quickening of growth the following year.

The Chancellor, Mr Gordon Brown, said yesterday he expected the economy to grow at only 1.5 per cent in the next fiscal year to March 31st, 2000, because of the slowdown throughout the world.

He previously forecast growth of about 3 per cent but predicted yesterday that the pace of growth would quicken again in 2000 to 2.25-2.75 per cent.

Mr Brown was presenting a report to parliament setting the stage for next March's budget. "Because in the last 18 months inflation has been brought down to the target of 2.5 per cent and because Britain has set in place a long-term monetary framework with the independence of the Bank of England, it is better placed than in the past to face these global difficulties," he said.

Economists said his forecasts seemed optimistic. "The more difficult decisions will come next year if the growth outlook has deteriorated," said Mr Jeremy Hawkins of Bank of America.

Mr Brown also argued that the lower level of forecast growth remained consistent with stable inflation, sending a signal to the Bank of England that interest rates could continue falling.

The central bank's monetary policy committee is expected to agree a quarter-point cut in the bank's short-term benchmark interest rate to 7 per cent. British financial markets reacted calmly to the statement. The 10-year benchmark gilt (government bond) yielded 4.975 per cent at the close, down from 5.1 per cent on Monday. The FTSE 100 index closed down 21.6 points at 5,503.9.

Mr Brown said the government would run a budget surplus this year of £1.5 billion, a marked improvement on the £1 billion deficit he forecast in March.

He said leeway the Treasury had built into its plans allowed him to press ahead with large increases in spending in two areas dearest to the ruling Labour party's heart.

"We will invest an additional £40 billion in the modernisation of education and health over the next three years," he said.

He also promised consultation on a range of initiatives to boost UK productivity. These include a review of the banking industry's relationship with business, pressure for greater transparency by institutional investors, fresh encouragement for employee share ownership and tax breaks to help small business.

He said Britain still suffered from a 40 per cent productivity gap with its most successful competitors.

Because of its reduced borrowing needs, the government has cancelled plans for an auction of short-dated gilts planned for March 24th.