Cuts and VAT rise leave UK economy ‘uncertain’

The independent Office for Budgetary Responsibility (OBR) increased its growth forecast for 2010 from 1.2 per cent to 1.8 per cent, but there was a note of caution as it lowered its forecasts for 2011 from 2.3 per cent to 2.1 per cent and for 2012 from 2.8 per cent to 2.6 per cent as a result of the spending cuts and VAT rise planned by the government.

The forecast for public borrowing in 2010/11 was also lowered from £149.5bn to £148.5bn, and it revealed a drastic cut in the number of public sector jobs it believes will go as a result of the four-year spending review from 490,000 to 330,000.

The tax and spending watchdog warned that the economic outlook was “inherently uncertain” and recovery would be slower than after previous recessions.

“Britain is on course both to grow the economy and balance the books.” Chancellor George Osborne

Chancellor George Osborne told MPs: “After the deepest recession since the war, the greatest budget deficit in our peacetime history, and the biggest banking crisis of our lifetimes, recovery was always going to be more challenging than after previous recessions.

“But the message from the Office for Budget Responsibility is that Britain’s economic recovery is on track.”

He went on: “Britain is on course both to grow the economy and balance the books – something some people repeatedly said would not happen.”

The OBR was set up by the Chancellor in May and its forecasts will provide the fiscal framework for the next Budget in March.

'No drastic changes of perception'
At the grand surroundings of Lord Kitchener's old residence over-looking The Mall for the OBR forecasts (Robert Chote's come on in the world - he used to have to issue IFS forecasts in a dingey basement in Bloomsbury), writes Political Editor Gary Gibbon.

The main headline is that this recovery will be slow and sluggish, slower than anything we've known in post-war recoveries. Growth forecasts, as widely leaked, are slightly better for this year and slightly worse for the year after. 

There are signs (table 4.26, p 131) of a useful £6B surplus for a tax giveaway pre-election 2015 Budget.

None of this drastically changes the perceptions of the spending round and having been on the receiving end of some brutal and damaging analysis from R. Chote in the past, the Chancellor's team will be feeling pretty satisfied with what he turned out for our consumption today.

Read more from Gary Gibbon's blog

The OBR’s Economic and Fiscal Outlook report said: “Our central forecast is that the economy will continue to recover from the recession, but at a slower pace than in the recoveries of the 1970s, 1980s and 1990s.

“This relatively sluggish medium-term outlook reflects the gradual normalisation of credit conditions, efforts to reduce private sector indebtedness and the impact of the Government’s fiscal consolidation.”

The drop in the number of public sector jobs the OBR expects to go is largely as a result of the additional cuts in welfare spending announced in the Spending Review, the report said. It also expects private sector employment to grow by 1.5 million jobs.

The unemployment rate is predicted to peak at 8 per cent in 2011.

Economics editor Faisal Islam writes: “Growth assumed to be underpinned by an export-led recovery, in turn underpinned by effective depreciation of sterling in 2007. This effect yet to be actually seen.”

Who Knows Who: OBR boss Robert Chote

OBR chairman Robert Chote told a press conference in London that the cuts to welfare spending over public service spending meant that there was 2.5 per cent more to spend on general Government employment than at the time of the last forecasts following the June Budget.

He said a double-dip recession was “not impossible” but said it was “not our central expectation”. He added: “Even if it did, it would not derail the recovery of the economy over the medium term.”

Corporation tax

The Chancellor did unveil one change to Corporation Tax in his statement. From April 2013, the government will introduce a lower 10 per cent Corporation Tax rate on profits from newly commercialised patents. This, the Chancellor announced, has secured an investment programme from GlaxoSmithKline totalling £500m.

That includes manufacturing a respiratory device in Hertfordshire, launching a £50m Venture Capital Fund for healthcare research, establish a new facility at Nottingham University to develop “green chemistry” technology and build a biopharmaceutical plant in the UK. Mr Osborne said this investment would creat 1,000 jobs.

Ireland bailout

The Chancellor also updated MPs on the three-year bailout package for Ireland, saying that the UK’s bilateral loan will be £3.25bn. He said it was “in Britain’s national interest” as “it will help one of our closest economic partners manage through these difficult conditions.”

He also said that he and the president of the Eurogroup made clear that the UK would not be part of a permanent bailout mechanism, and the existing European Financial Stability Mechanism, of which the UK is a part, will cease to exist when a permanent mechanism is put in place.