Britain is set to avoid a double-dip recession but faces a long and painful climb back to pre-downturn levels of growth because of unprecedented cuts in Government spending, the country's leading business organisation said today.
The CBI said it now expects Britain's economy to continue growing this year and next, but warned that the recovery would be "weak" and driven only by the private sector. The employers' group unveiled its latest forecasts for UK economic growth on the day that the Office of Budget Responsibility (OBR) is set to offer its prognosis for the future.
The OBR, set up by George Osborne last month, has prepared independent growth forecasts, which the Chancellor will use as he frames the emergency Budget scheduled for a week tomorrow.
The CBI said it expects the UK economy to grow at a rate of 1.3 per cent this year – which is slightly faster than the 1 per cent forecast made in March, but in line with an existing Treasury projection that sees growth at 1 to 1.5 per cent. In 2011, however, the CBI predicts the economy will grow 2.5 per cent, while the Treasury has forecast 3.25 per cent.
The OBR, headed by Sir Alan Budd a former senior Treasury civil servant and a founding member of the Bank of England's Monetary Policy Committee, is expected to revise that Treasury figure down today, almost certainly to a level much more in line with the CBI's expectations. Even these are more optimistic than the consensus opinion of independent forecasters, who predict growth of 2.2 per cent next year.
Capital Economics, the think tank, said this level of revision would mean the Government would face a sharply increased public sector borrowing requirement. If the OBR were to predict growth of 2.5 per cent next year, the Government would have to borrow £8bn more than previously expected in this financial year alone. The extra borrowing needed would rise to £21bn in the 2014-15 financial year. "As a result, the Budget will probably have to incorporate measures building to £20bn worth of tightening, if not more," said Roger Bootle, the managing director of Capital Economics. "Additional cuts will account for at least some of this, though we won't know the full gory details until the spending review is published in the autumn; but big tax rises are likely."
The CBI said it welcomes the introduction of independent forecasts from the OBR, but warned that efforts to get borrowing under control would undermine the strength of the economic recovery. Richard Lambert, the CBI's director-general, also warned that the risks facing Britain and the rest of the world are increasing.
"Over the last three months, the political and economic backdrop at home and abroad has shifted dramatically – turbulence has returned to global financial markets as concerns about European sovereign debts have intensified, underlining the need for the UK to tackle its large budget deficit urgently," Mr Lambert said. "It is clear that the private sector will have to be the main driver of economic growth to offset lower Government spending."
Fears about the contents of the emergency Budget have prompted a wide range of interest groups to campaign against potential measures, with a particularly vociferous campaign against the idea of a significant increase in capital gains tax.
The prospect of higher VAT has also unnerved some groups, particularly among retailers already concerned that other tax rises will hit consumers' spending power. The CBI added to fears about the consumer recovery yesterday, warning it expects the Bank of England to raise interest rates before the end of the year – earlier than many economists have been forecasting.
However, Terry Scouler, chief executive of the EEF, the manufacturers' organisation, warned ministers to be careful about damaging business's ability to invest for the future.
"Industry recognises that the remedy will not be pain-free, but we will want to see a clear plan with all the bad news out of the way now," Mr Scouler said. "We cannot have five years of a dripping tap of measures that will damage confidence and investment."