Economic outlook 'uncertain'

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The Independent Online

The outlook for the economy is "inherently uncertain" and recovery will be slower than after previous recessions, the UK's tax and spending watchdog warned today.

The Office for Budget Responsibility said the impact of Government deficit-busting measures - which include a hike in VAT to 20% and an £81 billion package of spending cuts - would lead to "sluggish growth" in the medium term.

But the OBR - formed in May to make an independent assessment of public finances and the economy - did slash its projections for public sector job cuts over the next four years from 490,000 to 330,000.

The watchdog's forecast - which will provide the fiscal framework for the Government's next budget in March - raised estimates for GDP growth in 2010 from 1.2% to 1.8%, but lowered growth in 2011 and 2012 from 2.3% to 2.1% and from 2.8% to 2.6% respectively.

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 OBR said the Government has a "better than 50%" chance of meeting its mandate to reduce the structural deficit - the gap between Government spending and taxes - by 2015-16.

Projections for public borrowing were similar to the OBR's June forecast, as it slightly lowered its estimate in the current 2010-11 financial year to £148.5 billion from £149.5 billion.

The watchdog also added that as the Government reduced its planned cuts in public services spending, by announcing additional cuts in welfare spending, it expects the number of public sector job losses planned for the next four years to significantly shrink.

As growth slows in the near-term, the OBR expects total unemployment to rise to a peak of just over 8% in 2011 - in line with previous forecasts. The watchdog then expects unemployment to fall to just over 6% by 2015.

The OBR also expects the rate of inflation - or cost of living - to be higher in 2010 and 2011 than in its June forecast, but will fall below the Bank of England's 2% target by 2012, as the effects of the VAT hike fade away.

Economic growth in the UK has slowed down over the year, although the most recent quarterly figure for GDP output was better than expected.

The Office for National Statistics said the British economy grew 0.8% between July and September, compared with 1.2% in the previous three months.

The third quarter GDP growth eased fears of a double dip recession and reinforced Government hopes that the private sector would pick up the slack created in the economy by mammoth public spending cuts.

The 152-page report from the OBR said the economy had grown more strongly between the spring and autumn this year than expected in June, but this growth was "volatile".

Looking ahead, the report said: "Prospects for growth in the medium-term are inherently uncertain."

It added there were upside and downside risks to the recovery.

The report went on: "Our central forecast implies a relatively slow recovery from recession by historical standards."

Earlier, the European Commission published its own forecast for the UK recovery.

The EC said the recovery would gradually gather momentum over the next two years despite headwinds from the austerity measures. It expects the UK economy to grow by 1.8% in 2010, by 2.2% in 2011 and by 2.5% in 2012.

Unite general secretary-elect Len McCluskey said: "The reality in the workplaces of the UK is of job losses, financial cutbacks and belt tightening by our members in the face of the current harsh economic climate.

"Yet, the OBR is upgrading its growth forecast for 2010 to 1.8% from the 1.2% predicted in June.

"We seem to be living in two parallel economic universes - the optimistic one being peddled by the coalition's creation, the OBR.

"And then there is the 'real' one which sees firms being unable to borrow money from the state-owned and other banks to invest in jobs and expanding their businesses, where £81 billion of public spending cuts will hit demand in communities, where the public sector is a major economic generator and where reputable economists are predicting more than one million jobs being lost in the public and private sectors.

"Something does not add up here and this latest forecast from the OBR poses as many questions as it attempts to answer."

Shadow chancellor Alan Johnson said: "The OBR's forecast for a weak recovery reminds us all of the risks this Government has chosen to take with the economy.

"Growth forecasts have been cut for the next two years as the momentum in the economy this year fails to feed though to future years.

"And the OBR warns that it now expects unemployment to rise next year.

"For families up and down the country a jobless recovery is no recovery at all."

Speaking at press conference in London, Robert Chote, chairman of the OBR, said the Government's decision to cut welfare spending over public services spending had left 2.5% more to spend on general Government employment than at the time of the June forecasts.

Asked if the OBR forecasts put an end to fears of a double-dip recession, Mr Chote said: "It's not impossible, but its not our central expectation for a double-dip to happen.

"Even if it did, it would not derail the recovery of the economy over the medium term."

Economists, including David Kern at the British Chamber of Commerce and Graeme Leach of the Institute of Directors, have labelled the OBR forecasts "optimistic".

Responding to the criticism, Mr Chote said: "This is our central view. There are other forecasts out there that are more and less optimistic.

"We've discussed risks, including how consumers behave, the response to the fall in sterling and credit conditions, and the risks have been balanced."