New economic forecasts spark war of words on cuts

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Forecasts from the new independent watchdog for the UK's public finances sparked a war of words today a week before Chancellor George Osborne's emergency Budget.

The Office for Budget Responsibility (OBR) gave positive news on borrowing, which will be £8 billion below the £163 billion feared in the March Budget and £23 billion lower over the next five years.

But it also slashed growth forecasts - leaving a bigger black hole to fill with tax hikes or spending cuts and prompting warnings that sharpening the axe next week could scupper the UK's sluggish recovery.

TUC leader Brendan Barber said the figures showed slashing spending would be "increasingly unnecessary and dangerous".

But Mr Osborne retorted that the forecasts were "damning evidence that the mess the previous Government left behind is even bigger than we thought".

The OBR has prepared its report without ministerial interference and will update the forecasts again to take into account policy moves to be unveiled in the Budget.

The watchdog pencilled in growth of 2.6% in 2011 - well below the 3.25% predicted in March's Budget - with a 2.8% forecast for both 2012 and 2013, which is again far below the previous Government's prediction.

The OBR said "trend growth" for the UK economy will be dragged back for some time by the financial crisis.

This leaves the UK's structural deficit - which is impervious to the economic cycle - bigger than feared over the next five years.

This is now forecast at 8% of GDP this year and falling to 2.8% in 2014/15, compared with 7.3% and 2.5% respectively in March's Budget.

The OBR admitted "major uncertainties" over its predictions - including banks' ability to lend to support the recovery, the extent to which the private sector can fill the gap left by public spending cuts, and worries over demand in Europe, a major export market for the UK.

But the stronger than expected tax revenues seen this year meant that the OBR could edge down its borrowing estimates, although they remain close to record levels.

Under the previous Government's figures, net borrowing over the next five years to 2014/15 was forecast to hit £567 billion, although in the OBR forecasts total borrowing is pencilled in at £544 billion.

Shadow Chancellor Alistair Darling said the OBR's forecasts vindicated his stance of supporting the UK's fragile recovery with public spending this year.

He told BBC News: "It does rather underline the point that I have been making that if you take money away from the economy you run the risk that growth will be lower still.

"This Government has no strategy for growth and if you don't get growth you won't get borrowing down."

ING Bank economist James Knightley said the figures showed the coalition "starting from a better base" in its efforts to tackle the deficit, but warned that "significant pain" still lay ahead for the economy.

CBI director-general Richard Lambert said the OBR predictions confirmed the organisation's view that the recovery would be "slow and protracted".

He said: "The OBR's data suggest the underlying public finance position is worse than previously thought. The bigger structural deficit will require tougher action by the Government to balance the books at next week's emergency Budget.

"We believe this should be achieved through radical public service reform and spending restraint, rather than tax rises which would hurt businesses and consumers."