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
ebooks
ebooksA special investigation by Andy McSmith
  • Get to the point
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

SThree: Graduate Recruitment Resourcer

£20000 - £22500 per annum + OTE £30K: SThree: SThree Group have been well esta...

Ashdown Group: Treasury Assistant - Accounts Assistant - London, Old Street

£24000 - £26000 per annum + benefits : Ashdown Group: A highly successful, glo...

Ashdown Group: Business Analyst - Financial Services - City, London

£50000 - £55000 per annum: Ashdown Group: Business Analyst - Financial Service...

SThree: Trainee Recruitment Consultant

£18000 - £23000 per annum + OTE £45K: SThree: At SThree, we like to be differe...

Day In a Page

Not even the 'putrid throat' could stop the Ross Poldark swoon-fest'

Not even the 'putrid throat' could stop the Ross Poldark swoon-fest'

How a costume drama became a Sunday night staple
Miliband promises no stamp duty for first-time buyers as he pushes Tories on housing

Miliband promises no stamp duty for first-time buyers

Labour leader pushes Tories on housing
Aviation history is littered with grand failures - from the the Bristol Brabazon to Concorde - but what went wrong with the SuperJumbo?

Aviation history is littered with grand failures

But what went wrong with the SuperJumbo?
Fear of Putin, Islamists and immigration is giving rise to a new generation of Soviet-style 'iron curtains' right across Europe

Fortress Europe?

Fear of Putin, Islamists and immigration is giving rise to a new generation of 'iron curtains'
Never mind what you're wearing, it's what you're reclining on

Never mind what you're wearing

It's what you're reclining on that matters
General Election 2015: Chuka Umunna on the benefits of immigration, humility – and his leader Ed Miliband

Chuka Umunna: A virus of racism runs through Ukip

The shadow business secretary on the benefits of immigration, humility – and his leader Ed Miliband
Yemen crisis: This exotic war will soon become Europe's problem

Yemen's exotic war will soon affect Europe

Terrorism and boatloads of desperate migrants will be the outcome of the Saudi air campaign, says Patrick Cockburn
Marginal Streets project aims to document voters in the run-up to the General Election

Marginal Streets project documents voters

Independent photographers Joseph Fox and Orlando Gili are uploading two portraits of constituents to their website for each day of the campaign
Game of Thrones: Visit the real-life kingdom of Westeros to see where violent history ends and telly tourism begins

The real-life kingdom of Westeros

Is there something a little uncomfortable about Game of Thrones shooting in Northern Ireland?
How to survive a social-media mauling, by the tough women of Twitter

How to survive a Twitter mauling

Mary Beard, Caroline Criado-Perez, Louise Mensch, Bunny La Roche and Courtney Barrasford reveal how to trounce the trolls
Gallipoli centenary: At dawn, the young remember the young who perished in one of the First World War's bloodiest battles

At dawn, the young remember the young

A century ago, soldiers of the Empire – many no more than boys – spilt on to Gallipoli’s beaches. On this 100th Anzac Day, there are personal, poetic tributes to their sacrifice
Dissent is slowly building against the billions spent on presidential campaigns – even among politicians themselves

Follow the money as never before

Dissent is slowly building against the billions spent on presidential campaigns – even among politicians themselves, reports Rupert Cornwell
Samuel West interview: The actor and director on austerity, unionisation, and not mentioning his famous parents

Samuel West interview

The actor and director on austerity, unionisation, and not mentioning his famous parents
General Election 2015: Imagine if the leading political parties were fashion labels

Imagine if the leading political parties were fashion labels

Fashion editor, Alexander Fury, on what the leaders' appearances tell us about them
Phumzile Mlambo-Ngcuka: Home can be the unsafest place for women

Phumzile Mlambo-Ngcuka: Home can be the unsafest place for women

The architect of the HeForShe movement and head of UN Women on the world's failure to combat domestic violence