UK's budget office cuts outlook as austerity looms

[June 14, 2010]  LONDON (AP) -- Britain's new Office for Budget Responsibility offered a bleak outlook Monday in its first forecasts for economic growth and public finances, setting a baseline for the new government's emergency budget next week.

The agency -- created by Prime Minister David Cameron's coalition government as it prepares painful austerity cuts -- predicted economic growth of 2.6 percent in 2011, down from the 3.25 percent estimated by the previous government.

Still, the figure was better than the consensus forecast of 2.2 percent. The new agency also surprised analysts by predicting that total borrowing between this year and 2015 will be 22 billion pounds ($32.4 billion) lower than former Prime Minister Gordon Brown's government had predicted in March.

"A rule of thumb measure is each 1 percent off economic growth results in an additional 10 billion on the public borrowing number," said Gerard Lane, analyst at Shore Capital.

More borrowing would mean more pressure on the government to cut spending and raise more revenue.

Britain racked up a record public sector deficit of 156 billion pounds ($229 billion) in the previous fiscal year which ended April 5.

The new estimates will set the stage for the government to introduce an emergency budget next week, setting out plans for cutting spending and raising revenue to shrink a record spending deficit.

"With borrowing not as bad as expected but growth forecast as sluggish, deep cuts now appear increasingly unnecessary and dangerous," Brendan Barber, general secretary of the Trades Union Congress.

"Any attempt to press ahead with austerity plans will look like a political project to remodel Britain rather than an economic necessity," Barber said.

But Stephen Robertson, director general of the British Retail Consortium, said the OBR forecasts "better reflect reality and show that the government must follow through on even bigger spending cuts than announced so far."

The agency predicted GDP would rise by 1.3 percent this year and 2.8 percent in 2012.

The government's rationale for establishing the Office for Budget Responsibility was to provide independent forecasts. Treasury Chief George Osborne has said the previous system could tempt the government to make overly optimistic assumptions to justify its spending ambitions.

The National Institute for Economic and Social Research, a respected think tank, praised the OBR report for providing "much more detail than did the Treasury about what underlies the forecast."

"The Office for Budget Responsibility's GDP growth forecasts look more realistic and defensible than the ones contained in the Labour government's March budget, although we still suspect they will turn out to be on the high side," said Howard Archer, economist at IHS Global Insight.

More data on the state of the economy is due this week: inflation on Tuesday, unemployment and industrial production on Wednesday and retail sales on Thursday.

___

Online:

http://budgetresponsibility.independent.gov.uk/

[Associated Press; By ROBERT BARR]

Copyright 2010 The Associated Press. All rights reserved. This material may not be published, broadcast, rewritten or redistributed.