November 28, 2010 10:37 pm

Warning over higher OBR growth forecasts

Growth for 2010 is expected to be revised upwards and potential public sector job losses adjusted downwards on Monday when the new independent budget watchdog presents its first autumn forecast.

But leading economists warn in a Financial Times snapshot survey that in spite of some cheerier news, it is too early to stop worrying about the effects of the coalition’s deficit reduction plans on future growth.

That view is shared by Alan Johnson, shadow chancellor, who tells the FT in an interview in Monday’s paper: “The signal says ‘proceed with caution’ but they’re just full throttle, full steam ahead. It’s a huge, reckless gamble.”

Sixteen City economists believe the Office for Budget Responsibility would be ill-advised to take the faster-than-expected growth this year as evidence the economy can easily withstand the imminent tax rises and public spending cuts.

Robert Chote, chairman of the OBR, will outline the latest official economic forecasts today and is expected to raise the estimate for 2010 growth – made at the time of the June Budget – from 1.2 to almost 1.8 per cent.

Public sector job losses projected at 490,000 by 2014-15 in the last OBR report could be scaled back, after George Osborne, chancellor, decided to take an axe to benefits, sparing some public spending.

In the second and third quarters of 2010, the economy grew by 0.8 per cent more than the OBR expected at the time of June’s Budget. This rapid growth came on the back of income tax and VAT rises and as cuts were implemented.

But Jonathan Loynes of Capital Economics said the fact economic growth was already slowing in the third quarter is “a worry” and “evidence from other countries which have started their fiscal consolidations – not least Ireland – is hardly encouraging”.

Colin Ellis of the British Venture Capital Association said: “I would expect support from the household sector to ease even without the cuts – and with investment and trade still yet to seriously take up the baton of growth, there is still a risk we see soggy growth for a while as the cuts really start to bite.”

None of the 16 economists expected a double-dip recession, but most expected the rate of growth roughly to halve from that of the most recent two quarters.

Peter Spencer of the Ernst & Young Item Club said it was now the responsibility of corporate executives to lead a private sector recovery.

It is likely the OBR will hug the City consensus, reducing its forecast for 2011 growth a little, thereby avoiding appearing excessively optimistic in its first forecast since being established on a permanent footing.

The OBR will test the sensitivity of its forecasts to different assumptions about spare capacity in companies and is all but certain to advise George Osborne that the government is still on course to have a better than 50:50 chance of eliminating the hole in the public finances by 2015.

The Treasury has made it clear it will not be announcing any tax changes or further public spending cuts in its autumn statement on Monday, but the chancellor will comment on the outlook for the economy and the public finances.

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