Jeremy Warner: Chancellor already in trouble on forecasts


Outlook: I may have spoken too soon earlier this week when I dismissed the IMF's forecast of a 4.1 per cent contraction in the UK economy this year as too pessimistic. Figures released yesterday show that the UK economy shrank a stomach-churning 1.9 per cent in the first quarter of this year, putting the current recession on track to be the worst peak-to-trough economic contraction since the Second World War.

The record to date is held by the recession of the early 1980s, when from peak to trough the economy shrank by 5.9 per cent. This one is already at more than 4 per cent, with little sign of a let-up. The Government was at pains to insist yesterday that a 1.9 per cent shrinkage for the first quarter was within its own range of expectations and therefore didn't undermine the Budget forecast of a 3.5 per cent decline for the year as a whole.

Really? That's not what the Chancellor said on Budget day, when he anticipated that the quarterly decline would be "similar" to that of the 1.6 per cent shrinkage recorded for the final quarter of last year. In any case, with just three months under our belts, the UK economy is already more than half way to the Government's forecast for the year as a whole. If the Treasury's predictions turn out to be wrong, the Chancellor will have to borrow even more than the £175bn he's got pencilled in for this year.

Small wonder that the gilts market has taken a further lurch downwards. The idea that the UK might lose its triple-A credit rating isn't quite as fanciful as ministers like to pretend. In a note issued this week, Moody's warned in barbed tones that should whoever is in power after the next general election not take steps to bring the structural deficit into balance more quickly than envisaged in the Budget, then it may have implications for the rating.

Moody's is also assuming that the UK economic model isn't lastingly dented, in the sense that flexibility in the economy will allow growth in other sectors to compensate for the loss of dynamism in financial services and the housing market. That's quite an assumption.

It's still not impossible the Treasury will be proved right on growth for this year, and, in any case, given the already calamitous state of the public finances, the difference between the Chancellor's 3.5 per cent and the IMF's 4.1 per cent scarcely seems to matter.

The reason why the Chancellor may be right in thinking the economy will be recovering by the end of this year is that much of the contraction which has taken place so far is down to destocking. Once the inventory adjustment stops, that in itself will cause the contraction to slow or even reverse. On the other hand, more than a million people are expected to be added to the ranks of the unemployed over the next year, which will have a powerfully negative effect on consumer demand.

If the outlook for the UK economy looks bad, the Government can at least take heart from the fact that it appears to be equally poor almost everywhere else in the advanced world. The size of economic contraction in Germany over the next two years is expected to be even bigger than Britain's. The same goes for Japan.

What makes Britain different is the scale and speed of the deterioration in the public finances. The relative size of the structural deficit in Britain over the next five years is expected to be much higher than almost anywhere else. In getting itself into this predicament, the Government mistook the windfall of buoyant tax revenues from the City and the housing market as a permanent increase in the country's tax base. Now these revenues have gone, the Government finds it cannot afford the public spending it has signed up for.

Yet even on this front, the situation isn't quite as bad as it is sometimes painted. The scale of the deterioration is alarming, but a comparatively low level of public debt initially means that the UK can borrow an awful lot more before it becomes an outlier among similarly triple A-rated countries.

Even at its forecast peak of 80 per cent of national income, UK public debt would still be beneath the average for advanced economies as a whole. All the same, it's going to be touch and go, and, as Moody's implies, the period of fiscal consolidation – that's austerity to you and me – that awaits after the next election is going to be a good deal more severe than outlined in the Budget.

Start your day with The Independent, sign up for daily news emails
Voices
There will be a chance to bid for a rare example of the SAS Diary, collated by a former member of the regiment in the aftermath of World War II but only published – in a limited run of just 5,000 – in 2011
charity appealTime is running out to secure your favourite lot as our auction closes at 2pm today
News
File: James Woods attends the 52nd New York Film Festival at Walter Reade Theater on September 27, 2014
peopleActor was tweeting in wake of NYPD police shooting
Sport
Martin Skrtel heads in the dramatic equaliser
SPORTLiverpool vs Arsenal match report: Bandaged Martin Skrtel heads home in the 97th-minute
News
Billie Whitelaw was best known for her close collaboration with playwright Samuel Beckett, here performing in a Beckett Trilogy at The Riverside Studios, Hammersmith
people'Omen' star was best known for stage work with Samuel Beckett
PROMOTED VIDEO
ebooks
ebooksA year of political gossip, levity and intrigue from the sharpest pen in Westminster
Latest stories from i100
Have you tried new the Independent Digital Edition apps?
Independent Dating
and  

By clicking 'Search' you
are agreeing to our
Terms of Use.

iJobs Job Widget
iJobs Money & Business

Carlton Senior Appointments: Private Banking Manager - Intl Bank - Los Angeles

$200 - $350 per annum: Carlton Senior Appointments: Managing Producer – Office...

Carlton Senior Appointments: San Fran - Investment Advisor – Ind Advisory Firm

$125 - $225 per annum: Carlton Senior Appointments: San Fran - Investment Advi...

Sheridan Maine: Commercial Finance Manager

Up to £70,000 per annum + benefits: Sheridan Maine: Are you a qualified accoun...

Sheridan Maine: Regulatory Reporting Accountant

Up to £65,000 per annum + benefits: Sheridan Maine: Are you a qualified accoun...

Day In a Page

Surrounded by high-rise flats is a little house filled with Lebanon’s history - clocks, rifles, frogmen’s uniforms and colonial helmets

Clocks, rifles, swords, frogmen’s uniforms

Surrounded by high-rise flats is a little house filled with Lebanon’s history
Return to Gaza: Four months on, the wounds left by Israel's bombardment have not yet healed

Four months after the bombardment, Gaza’s wounds are yet to heal

Kim Sengupta is reunited with a man whose plight mirrors the suffering of the Palestinian people
Gastric surgery: Is it really the answer to the UK's obesity epidemic?

Is gastric surgery really the answer to the UK's obesity epidemic?

Critics argue that it’s crazy to operate on healthy people just to stop them eating
Homeless Veterans appeal: Christmas charity auction Part 2 - now LIVE

Homeless Veterans appeal: Christmas charity auction

Bid on original art, or trips of a lifetime to Africa or the 'Corrie' set, and help Homeless Veterans
Pantomime rings the changes to welcome autistic theatre-goers

Autism-friendly theatre

Pantomime leads the pack in quest to welcome all
The week Hollywood got scared and had to grow up a bit

The week Hollywood got scared and had to grow up a bit

Sony suffered a chorus of disapproval after it withdrew 'The Interview', but it's not too late for it to take a stand, says Joan Smith
From Widow Twankey to Mother Goose, how do the men who play panto dames get themselves ready for the performance of a lifetime?

Panto dames: before and after

From Widow Twankey to Mother Goose, how do the men who play panto dames get themselves ready for the performance of a lifetime?
Thirties murder mystery novel is surprise runaway Christmas hit

Thirties murder mystery novel is surprise runaway Christmas hit

Booksellers say readers are turning away from dark modern thrillers and back to the golden age of crime writing
Anne-Marie Huby: 'Charities deserve the best,' says founder of JustGiving

Anne-Marie Huby: 'Charities deserve the best'

Ten million of us have used the JustGiving website to donate to good causes. Its co-founder says that being dynamic is as important as being kind
The botanist who hunts for giant trees at Kew Gardens

The man who hunts giants

A Kew Gardens botanist has found 25 new large tree species - and he's sure there are more out there
The 12 ways of Christmas: Spare a thought for those who will be working to keep others safe during the festive season

The 12 ways of Christmas

We speak to a dozen people who will be working to keep others safe, happy and healthy over the holidays
Birdwatching men have a lot in common with their feathered friends, new study shows

The male exhibits strange behaviour

A new study shows that birdwatching men have a lot in common with their feathered friends...
Diaries of Evelyn Waugh, Virginia Woolf and Noël Coward reveal how they coped with the December blues

Famous diaries: Christmas week in history

Noël Coward parties into the night, Alan Clark bemoans the cost of servants, Evelyn Waugh ponders his drinking…
From noble to narky, the fall of the open letter

From noble to narky, the fall of the open letter

The great tradition of St Paul and Zola reached its nadir with a hungry worker's rant to Russell Brand, says DJ Taylor
A Christmas ghost story by Alison Moore: A prodigal daughter has a breakthrough

A Christmas ghost story by Alison Moore

The story was published earlier this month in 'Poor Souls' Light: Seven Curious Tales'