By Lucy Phillips
14 June 2010
The Office for Budget Responsibility has published its first economic forecast, downgrading UK growth projections but predicting lower borrowing than previous forecasts.
The new independent fiscal watchdog said the UK economy would grow by 2.6% in 2011, down from an estimate of 3%–3.25% in the Labour government’s last Budget in March. Medium-term growth over the following three years was put at 2.7%, compared with a previous average of 3.5%.
The report concludes: ‘There is a smaller amount of spare capacity and future trend growth is likely to be weaker than was estimated in the March Budget’.
Chancellor George Osborne will use these forecasts when he announces the emergency Budget next week. The weaker economic outlook is expected to intensify pressure on the coalition government to cut public spending.
However, the OBR, headed by Sir Alan Budd, estimated that the public deficit would fall faster than predicted by Labour, to 10.5% of gross domestic product in 2010/11, compared with 11.1%. The watchdog also predicted lower government borrowing than the previous Treasury forecast. Higher than expected tax revenues are expected to leave borrowing at £155bn in 2010/11 and at £127bn in 2011/12. This compares with figures of £163bn and £131bn in the March Budget.
But the National Institute for Economic and Social Research expects growth to be even slower than the revised figures, and the budget deficit slightly higher. The think-tank attributed the OBR’s optimistic figures to delayed cuts in government consumption, compared with Labour’s assumptions.
Growth in government consumption in the March Budget was 1.25% in 2010, –1.5% in 2011 and –2% in 2012. This compares to estimates of 1.9%, -0.5% and -1.5% by the OBR.
The NIESR warned that the government would have to be prepared to cut public sector wages, reduce costs in the benefits system and increase taxes if it was to successfully balance the budget deficit by 2014/15 as intended.
