Well fancy that: the newly created Office for Budget Responsibility has decided that Labour's GDP growth forecast for 2010 of 3.25% was hopelessly optimistic, suggesting instead that the economy will grow about 2.6% (that's a full fifth lower – not exactly a rounding error). Since the Treasury seemed to be about the only people on the planet who thought the UK economy would bounce back so forcefully, this isn't a great surprise. But the interesting thing is what this means for next week's Budget: with the Government now looking at even bigger fiscal black hole than expected, George Osborne's case for painful cuts just got a little stronger...
This is the first set of forecasts from the OBR, which was created by the coalition after the election to act as an independent public finance watchdog. And the short-term picture is actually a little healthier than Alistair Darling predicted in the last Budget: it expects borrowing to hit £155bn in the current financial year, lower than the forecast £163bn, thanks largely to higher-than-expected tax receipts. But it's expecting a much slower recovery – just 2.6% next year and 2.8% in 2012 and 2013 (Darling suggested 3.5%) – so by 2015, the Government will actually need to borrow more money than scheduled. The OBR also thinks the structural deficit (that which won't disappear via growth) will actually get bigger over the period. And it admitted these figures could be even worse if the banks don't play their part, or the private sector can't pick up the slack as the public sector is cut back.
Speaking of which, these new figures are widely thought to strengthen Chancellor George Osborne's case for big spending cuts in next Tuesday's Budget (although Darling himself has pointed out that the lower short-term borrowing forecast weakens the case for a VAT hike). Business groups are already on his case, with the British Chambers of Commerce suggesting today that he needs to announce a two-year public sector pay freeze, as well as major pension reform. But as the recent protests in Greece and Spain have shown, civil servants are unlikely to take this lying down. The Budget may prove to be the trigger for some widespread industrial action.
The Government claims that prompt and decisive action to trim the deficit is the only way to shore up investor confidence in the UK. Markets are already fretting about the possible fall-out from some kind of sovereign debt default among the PIGS, or another banking crisis in somewhere like Ireland and Spain (the UK is heavily exposed to both). And with the Bank of England warning today that the number of people betting on a Black Monday-style 20% collapse in the value of the FTSE has shot up in the last month, we clearly need all the confidence we can get. So whatever the subtleties of these OBR numbers, you can bet your bottom sterling that the Government will use them as further justification for cuts. Either that, or it's softening us up so whatever happens won't seem as bad...
In today's bulletin:
Osborne primed after watchdog slashes growth forecast
BP under pressure to suspend divi as Obama demands more
Majestic raises a glass to upturn in results
Russia to get the rebranding treatment
MT Expert's Ten Top Tips: Make a million before lunch