Office for Budget Responsibility likely to sound note of gloom

Saturday, June 12, 2010
By Paul Martin

New independent public finances watchdog likely to revise down last Treasury forecasts for growth

Katie Allen
Sunday 13 June 2010

Britain’s watchdog for public finance, the Office for Budget Responsibility, is likely to set out a tough budget challenge for George Osborne tomorrow when it presents a gloomy economic outlook.

The forecasters, led by Sir Alan Budd, a former chief economic adviser at the Treasury, will unveil forecasts for growth below the previous government’s predictions, economists warn.

Often criticised as over-optimistic, the Treasury’s last outlook under Alistair Darling put growth at 1%-1.5% this year and 3%-3.5% next year. The 2010 forecast will probably be left as relatively credible but many believe the OBR’s 2011 outlook will come down, making reducing the deficit tougher.

“The OBR may well be more realistic, and so growth will be seen coming in lower, which makes it harder to plug the gap. Any fiscal tightening that is implemented might be offset from starting from a higher baseline in terms of the deficit,” said Hetal Mehta, senior economic adviser to the Ernst & Young Item Club.

Jonathan Loynes and Vicky Redwood at Capital Economics expect the OBR to set a “gloomy backdrop” for the emergency budget on 22 June. They see the 2011 growth forecast being cut to 2.5% and warn that could point to higher levels of borrowing in years to come.

“The OBR could forecast that borrowing by 2015 will be up to £20bn higher. This would clearly raise the pressure on the government to take some fairly drastic action in next week’s budget,” they comment.

Fiscal experts will get more to work with from Budd’s team than under the old Treasury forecasts. The growth and public finance predictions will be central figures rather than a range, with fan charts to illustrate uncertainties in either direction.

The forecasts will also stretch further into the future and there will be more detail on determinants, which in the past included the outlook for oil prices and inflation.

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