Growth forecasts revised down

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The UK's recovery prospects were dealt a blow today after Chancellor George Osborne revealed a cut to growth forecasts and said the public finances were likely to be more stretched than previously expected.

An unexpected drop in GDP at the end of 2010, surging oil prices and soaring inflation prompted the Office for Budget Responsibility (OBR) to lower its growth estimates for 2011 and 2012, Mr Osborne said.

The independent tax and spending watchdog lifted its growth forecasts for 2014 and 2015 - but some economists warned the body was being too ambitious and optimistic with its longer-term outlook.

However, while Government borrowing levels will drop more slowly than previously hoped, the OBR still expects the Government's austerity package to hit its aim of eliminating the structural deficit by 2015/16.

The deficit-busting programme includes £81 billion of spending cuts and a 20% hike in VAT. Hundreds of thousands of public sector jobs will be axed to achieve the goal.

In his annual Budget speech, the Chancellor said: "Britain has lost ground in the world economy and needs to catch up. We gambled on a debt-fuelled model of growth, which failed."

The OBR issued its last economic forecast in November but said the shock 0.6% decline in the economy in the final three months of last year had altered the picture.

In his annual Budget speech, Mr Osborne said GDP growth estimates for 2011 had been cut from 2.1% to 1.7%, while 2012 was revised down to 2.5% from 2.6%.

The long-term outlook was more upbeat as estimates for 2013 were held and forecasts for 2014 and 2015 were revised upwards to 2.9% from 2.8% and 2.8% from 2.7% respectively.

But David Kern, chief economist at the British Chambers of Commerce (BCC), said the OBR's new forecasts were "too ambitious".

He said: "The new forecast assumes a strong recovery in the early quarters of 2011, and may not have fully taken into account the effect of recent global events on the UK."

Mr Kern added: "Although the forecast beyond 2011 is also ambitious, it is more achievable, providing the Government's new growth strategy is successful in removing barriers facing businesses."

The Chancellor also revealed the rate of inflation, currently at 4.4%, is not expected to drop back to the Government's 2% target until 2013 - contrary to the Bank of England's belief it will fall back by 2012.

A combination of slow growth and higher inflation means public borrowing levels from 2011/12 through to 2015/16 are higher than previously forecast.

The OBR sees public borrowing of £122 billion in the next financial year, followed by borrowing of £101 billion in 2012/2013, £70 billion in 2013/2014 and £46 billion in 2014/2015.

But Government borrowing for this financial year is expected to come in at £146 billion, the Chancellor said, £2.5 billion below target but far from the £10 billion gap previously estimated by economists.

Public finances fell a further £11.8 billion into the red in February, official figures revealed yesterday, dashing hopes the Chancellor would have extra "wiggle room" in his Budget.

James Knightley, economist at Dutch bank ING, said the Government may not be able to cut spending as quickly as it hopes.

He said: "Admittedly the Chancellor has a buffer and suggests that his fiscal targets have a fair chance of being hit a year early. Given the current economic backdrop this buffer may well be fully utilised."

Howard Archer, chief UK and European economist at IHS Global Insight, warned that the OBR's longer-term forecasts were too optimistic and could lead to further fiscal tightening.

He said: "If the OBR's longer-term growth forecasts prove modestly optimistic, as we suspect, this suggests that the Chancellor will either eventually have to take additional fiscal corrective measures to achieve his long-term budgetary targets or accept some slippage."