Britain cuts forecasts before emergency budget

14th June 2010, Comments 0 comments

Britain revised down its economic growth and borrowing forecasts on Monday, setting the tone for the new government's emergency budget due next week.

British gross domestic product (GDP) is expected to grow by 2.6 percent in 2011, according to a new independent fiscal watchdog set up by Prime Minister David Cameron's coalition.

That compared with the 3.25-percent expansion forecast by the previous government, which lost power at a general election last month.

The Office for Budget Responsibility (OBR) added in a statement that the economy was expected to expand by 1.3 percent in 2010, which marked a slight upward revision.

State borrowing was meanwhile forecast to stand at 155 billion pounds in the current 2010/2011 financial year. That was lower than the previous estimate of 163 billion pounds.

The new forecasts were published ahead of an emergency budget on June 22 due from British finance minister George Osborne, who is widely tipped to unveil deep spending cuts and large taxation rises to fix the public purse.

OBR Chairman Alan Budd, speaking to BBC television, admitted that the new growth forecasts were gloomier than the previous figures, but added that the recession had not caused "permanent" damage to the British economy.

"When one says they're a lot gloomier, they are somewhat gloomier, but again these are all within the normal range of uncertainty," Budd told the BBC.

"No, we don't think there is permanent damage to the economy," he said in reference to the impact of the recession.

He added: "What we do want to emphasize is that all our findings are very uncertain, that's simply inevitable."

The OBR also forecast on Monday that GDP would expand by 2.8 percent in 2012, followed by growth of 2.8 percent and 2.6 percent in 2013 and 2014 respectively.

Britain's public finances have been severely stretched by the enormously expensive banking-sector bailouts, while a record-length recession which ended late last year has ravaged taxation revenues.

The nation's public deficit had rocketed to a record 156 billion pounds in the last 2009/2010 financial year.

Capital Economics analyst Jonathan Loynes said the lower state borrowing forecast would ease the pressure for severe fiscal tightening next week -- but warned that it would still be a "tough" budget.

"The lower path of public borrowing projected by the OBR might seem to relieve some of the pressure for an additional fiscal tightening in next week's budget," said Loynes.

"But we don't yet know quite what the new government's fiscal objectives are. We still expect a tough budget."

Trades Union Congress general secretary Brendan Barber argued that deep cuts were not now required.

"With borrowing not as bad as expected but growth forecast as sluggish, deep cuts now appear increasingly unnecessary and dangerous," said Barber.

ING economist James Knightley questioned whether the growth numbers were in fact still overly optimistic.

"We caution that the growth numbers still look a bit high -- ING forecasts growth of 1.0 percent this year and 1.5 percent for both 2011 and 2012."

He added: "Given the scale of fiscal consolidation ... there is going to be significant pain for the economy."

The new forecasts do not include the impact of austerity measures recently introduced by Cameron's Conservative-Liberal Democrat government, which last month ousted the previous Labour administration that was led by Gordon Brown.

© 2010 AFP

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