New watchdog set to downgrade growth forecast

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A new fiscal watchdog will set the scene for the emergency Budget by revealing today that Labour's last growth estimates were too optimistic.

The Office for Budget Responsibility (OBR) will forecast the economy and the public finances on the basis of no action being taken by government.

It is expected to downgrade former Chancellor Alistair Darling's 2011 forecast from 3.25% to 2.5% and pencil in lower figures for the following three years.

The estimates by the independent OBR - headed by former Treasury official Sir Alan Budd - will set a gloomy backdrop for George Osborne's Budget on June 22.

Despite some better than expected news on the near-term outlook for public finances, Capital Economics said the OBR could forecast that borrowing by 2015 will be up to £20 billion higher than expected at £95 billion.

"This would clearly raise the pressure on the Government to take some fairly drastic action in next week's Budget," the research consultancy said.

A downgraded UK growth forecast will ripple through the public finances, impacting tax revenues and pushing up spending.

In describing the UK's deficit challenge as "formidable", ratings agency Fitch recently warned that if growth is 1% lower than forecast in 2011, the deficit could be around 2% of GDP higher than current predictions.

The OBR will update its forecasts alongside next week's Budget, when policy measures are likely to bring big tax rises, including the previously announced jump in capital gains tax and possibly a hike in VAT.

Prime Minister David Cameron, who said the creation of OBR was designed to "stop any chancellor fiddling the figures ever again", has already warned that "painful" spending cuts will affect everyone over the coming years.

The OBR statement kicks off a busy few days for economic figures, with monthly figures for inflation, unemployment and public sector borrowing also due.

Mr Osborne will also make his first Mansion House speech on Wednesday, when he is expected to say that the Bank of England will be given prime responsibility for preventing or responding to future financial crises.