Britain slashes forecasts before emergency budget

14th June 2010, Comments 0 comments

Britain's new fiscal watchdog cut official economic growth and borrowing forecasts on Monday, setting the stage for next week's emergency budget that will attack a record deficit.

Gross domestic product (GDP) is expected to grow 2.6 percent in 2011, according to the Office for Budget Responsibility (OBR), a new independent body set up by Prime Minister David Cameron's coalition government.

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

The OBR said in a statement that the economy was expected to expand 1.3 percent in 2010, which marked a slight upward revision.

The forecasts were published ahead of an emergency budget on June 22 due from British finance minister George Osborne, who is widely tipped to axe spending and raise taxes to fix the public purse.

"This coalition government has inherited from its predecessor one of the largest deficits in the world," Osborne said.

He added that the 2011 growth forecast was "lower than the country was told at the time of the election," while the structural deficit was larger than had previously been admitted.

The OBR said state borrowing was forecast to stand at 155 billion pounds, or 10.5 percent of GDP, in the current fiscal year to March 2011. That was lower than the previous estimate of 163 billion pounds or 11.1 percent of GDP.

However, the OBR also revealed that the structural deficit -- the level of borrowing which is resistant to the economic cycle -- was higher than expected.

The structural deficit was forecast to stand at 8.0 percent of GDP in the current financial year, before falling to 2.8 percent in 2014/2015.

That compared with the previous estimates of 7.3 percent and 2.5 percent Labour's Alistair Darling gave in his March budget.

"The structural deficit -- that's the borrowing which doesn't fall even when the economy grows -- (is) higher in every year," Osborne said.

"Indeed, (OBR Chairman) 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."

Osborne's Conservative Party made a key election pledge to eliminate the bulk of the structural deficit within five years.

But Darling fought back on Monday, saying the OBR forecasts backed up his argument for not cutting spending in the current financial year.

"It does rather underline the point that I have been making that if you take money away from the economy you run the risk that growth will be lower still," he told the BBC.

"This government has no strategy for growth and if you don't get growth you won't get borrowing down," said Darling, who is now opposition finance spokesman.

The coalition last month outlined 6.25 billion pounds (7.57 billion euros, 9.11 billion dollars) of public spending cuts for the current financial year.

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

"The forecasts for growth are, sadly for our country, lower in every single year than the figures that were announced ... in March," Osborne said.

"He (Darling) told us growth would soar to 3.25 percent in 2011 and then 3.5 percent in 2012 ... We can only speculate as to why such rosy forecasts for a trampoline recovery were produced only weeks ahead of a general election."

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

The public deficit had rocketed to a record 156 billion pounds in the last 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.

© 2010 AFP

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