Events | 2010.06.14
Growth forecast is cut but borrowing improves
George Osborne\'s Office for Budget Responsibility says borrowing to remain at £155bn, but growth forecasts reduced
Britain\'s annual borrowing will be more than £20bn lower than first predicted, according to an independent body commissioned by the government, but growth forecasts have also been slashed.
The Office for Budget Responsibility (OBR ), headed by the former Treasury mandarin Sir Alan Budd, said the government needed to borrow about £155bn – £8bn lower than in March\'s budget – and £23bn lower over the five years to 2014-15.
Growth in the economy, which the previous government predicted would range between 3% and 3.5% for 2011, was revised down to 2.6%.
In a signal of difficult times ahead, the OBR forecast lower growth over the next four years with a rise to 2.8% in 2013 before falling back to 2.6% in 2014.
City economists said they were comfortable with the growth forecast, which is more in line with their consensus figure over the past six months, but opinion was divided over the prospects for the deficit with some experts arguing the £155bn figure was exaggerated and could be much lower.
The chancellor, George Osborne, pointed to the OBR\'s analysis of the core structural deficit, which he said revealed the UK was in a worse situation than previously reported.
He said: "The structural deficit – that\'s the borrowing which doesn\'t fall even when the economy grows – [is] higher in every year, and that\'s on what the OBR say are optimistic assumptions.
"Indeed, Alan Budd is explicit on the first page that if we were to switch to Labour\'s spending plans then interest rates would be higher and economic activity would be lower. It\'s damning evidence that the mess the previous government left behind is even bigger than we thought."
A government source in the Treasury said today that the OBR "understated" the size of the deficit because the forecast was a "central forecast" rather than a like-for-like comparison with the March budget unveiled by Darling.
But the source said that today\'s work by the new body "deserves credit" for laying out the scale of the problem, free from cautious estimates and government interference.
"It is unsurprising. This is one of the reasons we have done it and we are keen to push that transparency," said the source in reference to the OBR announcement.
"The last chancellor did fiddle the figures and the chancellor won\'t be able to do that."
Alistair Darling, the shadow chancellor, said the OBR growth figure was "slightly better than we forecast but still is not growing fast enough".
In line with several economists on both sides of the Atlantic, he warned against the deep spending cuts envisaged in next week\'s budget. "I do not believe we should take risks with our economy while our growth is underway," he said. "It is so fragile and it would be playing with thousands of people\'s jobs."
He also accused the government of not having a plan to stimulate economic growth.
"If you take away money from the economy, you run the risk that growth is lower still. And if you don\'t have a strategy for growth – and this government has no strategy for growth – then you will not get borrowing down. Look what\'s happened to Japan over the last 10 years. We can\'t afford to repeat that strategy here."
The shadow chancellor said over the weekend that he would demand a "very big apology" from David Cameron if, as he expected, government borrowing figures released today were better than forecast.
He accused the prime minister in a Guardian interview of deliberately exaggerating the scale of the problems to press ahead with pre-arranged plans to raise taxes and cut the size of the state.
Later today, Nick Clegg, the deputy prime minister, will outline the need for cuts in a speech on the economy at an event held by the Institute for Government, an independent charity working to make Whitehall and Westminster more efficient.
Markets reacted positively to the report, which dispelled previously alarmist claims that it would uncover a raft of previously unknown debts.
Yet the OBR\'s gloomy view of the government\'s structural deficit and the potential for growth was expected to spur the government to include large tax rises in the budget next week alongside deep cuts in public spending.
A sharp rise in VAT to 20% is one likely outcome, according to several economists. A move to push up capital gains tax to the 40% tax threshold is expected to be staged over several years, though there is considerable pressure from the Tory right to water down the proposals further.
Osborne said before the election that he planned to set up an independent body to assess the UK\'s debts. The OBR got down to work days after the Liberal Democrats agreed to join the Tories in a coalition. With Budd are Geoff Dicks, former chief economist at the Royal Bank of Scotland, and Graham Parker, a former senior civil servant who spent nine years in charge of the public finances team at the Treasury.
For more information, please visit
http://www.guardian.co.uk/business/2010/[...]nt-borrowing-lower-than-feared
