OBR to raise growth forecast for budget day

The Office for Budget Responsibility is set to raise its GDP growth forecast, but only by a whisker...

by Andrew Saunders
Last Updated: 06 Nov 2012
The OBR’s prediction for growth in the UK economy in 2012 is expected to increase very slightly, from around 0.7% to 0.8%. Not a big jump by anyone’s reckoning, but it will be welcome news for Chancellor George Osborne as he prepares to deliver his much anticipated budget on Wednesday all the same. Although the news doesn’t really leave him any extra room for giveaways or sweeteners, it does make the prospect of an ‘official’ double dip recession that much less, giving George one less thing to worry about.

So what’s prompted this outburst of controlled optimism? By far the biggest single factor is the decision to bring the Royal Mail pension scheme onto the state books, providing a windfall of £28bn this year. All very nice of course, but the long term outlook on that front is less rosy, as that’s a one-off gain whereas the ongoing liabilities of the scheme are not.

For the time being however, it will make it easier for Osborne to continue towards his target of eliminating the UK’s structural economic deficit by 2016/17, lowering expected government borrowing requirements by £1bn - £2bn per annum compared with the OBR’s last report in October. It should also mean that overall government borrowing will be around £92bn for 2012/13, the first time it will have been below £100bn since 2008/9. The figure for 2011/12 is thought likely to be around £125bn.

The news that the CPI inflation figure fell to a 15-month low of 3.4% in February  adds to a growing sense that the economy may have bottomed out last autumn and be heading in the right direction, albeit slowly.

The independent budgetary watchdog was created by the Government in 2010 to monitor the effects of government economic policy and is headed by economist Robert Chote, the former director of the Institute for Fiscal Studies. This report looks like a continuation of its overall cautious endorsement of the deficit reduction austerity plans.

On the revenue front, the OBR is warning that tax receipts are likely to remain down, as a result of both slowing VAT returns and reduced taking from the financial sector because of generally lower bonuses. So for all the flak they receive those fat cat bankers do have their uses when it comes time to tot up income tax returns.

Whilst the overall picture is still hardly a rosy one, the fact that there are unlikely to be any nasty surprises to spook the bond markets – or blindside the Chancellor – may help wee Georgie sleep a little easier tonight ahead of his big day tomorrow.

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