Why the numbers refuse to add up growth, George?

It was George Osborne's idea to set up the Office for Budget Responsibility. But its report on the economy made grim reading for him

Q.What happened to the forecasted growth?

A. The Office for Budget Responsibility, the Government's official fiscal watchdog, says that the life has been effectively squeezed out of the UK economy over the past year by higher than expected inflation. When it presented its analysis of the national finances at the time of the last Budget in March, the OBR said that growth was likely to be 1.7 per cent over 2011. But yesterday the OBR was forced to slash that estimate to just 0.9 per cent. And things are not expected to get any better next year.

In March, the OBR expected growth in 2012 to be a robust 2.5 per cent. But yesterday it said that growth over the next 12 months will be just 0.7 per cent, which means the economy will be essentially stagnant for the first half of the year. In his Budget speech in March, George Osborne was optimistic about the UK's growth prospects. He said that the "private sector growth must take the place of government deficits".

Mr Osborne and the Treasury expected a boom in British exports. Manufacturing was also expected to undergo a national resurgence. The Chancellor spoke of Britain being "carried aloft by the march of the makers". But none of that has happened. Or at least, it has not happened as fast as the Chancellor and the OBR expected six months ago. UK growth does, however, pick up under the OBR's projections in 2013 and 2014, although still at a lower rate than forecast in March.

Q. What does this mean for public borrowing?

A. Lower growth means higher than expected unemployment levels as fewer of the public sector workers being laid off in the coming years are absorbed into the private sector. The OBR expects unemployment to rise to 8.7 per cent of the labour force in 2013, up from 8.1 per cent expected in March. This translates into higher than expected welfare payments. The OBR says that 1.67 million Britons will be on the dole by 2014. In March it said the claimant count would peak at 1.54 million this year and fall steadily over the coming years.

Weak economic activity also means lower than expected tax revenues for the Treasury. All this means that the deficit – the amount that the Government must borrow each year to meet its outgoings – will not now fall on the timetable laid out by the Chancellor. The OBR said that public borrowing will come in higher every year of this parliament than it expected in March. By 2015-16 the OBR expects the Government to be borrowing £53bn (2.9 per cent of GDP), up from £29bn (1.5 per cent of GDP) forecast in March. This means that total cumulative borrowing over the next five years will be £111bn more than anticipated in the spring. The annual deficit gets added to the national debt each year, so the latter will rise too due to lower growth.

Annual public sector net debt is now forecast by the OBR to peak at 78 per cent of GDP in 2014-15, up from 71 per cent forecast in March.

The one bit of mitigating good news is that the UK's borrowing costs have fallen as investors have rushed to buy British government bonds, which they regard as a safe asset, in recent months. The OBR estimates that these lower interest rates will save the Government around £22bn in interest payments over the next four years.

Q. Does this mean the Chancellor will miss his fiscal targets?

A. In his March Budget speech George Osborne said that he would achieve a balanced current budget "by the end of the parliament". Given that the next election is scheduled to take place in the spring of 2015 and the OBR confirmed yesterday that the national books will not now be balanced until 2016-17, Mr Osborne will clearly not hit that target. Yet the "fiscal mandate" that Mr Osborne announced in June 2010 actually contained some flexibility. It committed the Government to bring spending into balance with revenues over a rolling five-year time horizon.

So long as Mr Osborne is on target to balance the budget over the next half decade, he is fulfilling his mandate. Yet the OBR has also revised its view of the underlying productive potential of the UK economy. It now says that there is less "spare capacity" in the economy than it previously believed. This means that more of the public sector deficit is "structural" rather "cyclical", meaning it will not automatically disappear when growth returns. And this judgement, in turn, required Mr Osborne to cut or tax more in order to bring the budget into balance over the five-year timeframe. Mr Osborne did so yesterday, with his plans to hold down public sector pay for longer and to cut child tax credits. The OBR said that these measures will reduce government borrowing by £8.3bn in 2015-16 and £15.1bn in 2016-17 keeping the Government on course to hit its targets.

The second part of the Chancellor's fiscal mandate was for the national debt, measured as a share of GDP, to be falling by end of the parliament. The OBR says he will achieve this. Though national debt will rise to 78 per cent of GDP in 2014-15, the OBR says it will fall to 77.7 per cent in 2015-16. That is hardly a significant fall, but it is technically enough to meet the target.

Q. So will austerity now last longer?

A. Yes. George Osborne originally intended to balance the budget by 2014-15, which would have given him room to announce tax cuts before the next election. But as he admitted yesterday, the "headroom" for such largesse has now gone. The Conservatives will go into the next election still committed to a programme of spending cuts and tax rises. Low growth also means that living standards will be squeezed for longer. In March the OBR expected real wage growth to turn positive next year. That turning point has now been pushed back to 2013.

Q. But is there light at the end of the tunnel?

A. The OBR says that Britain should avoid a recession next year. But other forecasters, including the Organisation for Economic Co-Operation and Development, expect an economic contraction. There is also the threat to the UK economy posed by the chaos in Europe, our largest single export market. The OBR says its weak outlook is based on the assumption that the single currency area "finds a way through its current crisis and that policymakers eventually find a solution that delivers sovereign debt sustainability". That is looking like an increasingly questionable assumption. The OBR has downgraded its growth forecasts four times since Mr Osborne's first emergency Budget in June 2010. It might well have to do so again.

Suggested Topics
News
A 1930 image of the Karl Albrecht Spiritousen and Lebensmittel shop, Essen. The shop was opened by Karl and Theo Albrecht’s mother; the brothers later founded Aldi
people
Arts and Entertainment
Standing the test of time: Michael J Fox and Christopher Lloyd in 'Back to the Future'
filmA cult movie event aims to immerse audiences of 80,000 in ‘Back to the Future’. But has it lost its magic?
Arts and Entertainment
Flora Spencer-Longhurst as Lavinia, William Houston as Titus Andronicus and Dyfan Dwyfor as Lucius
theatreThe Shakespeare play that proved too much for more than 100 people
News
exclusivePunk icon Viv Albertine on Sid Vicious, complacent white men, and why free love led to rape
PROMOTED VIDEO
Have you tried new the Independent Digital Edition apps?
News
ebookA unique anthology of reporting and analysis of a crucial period of history
Arts and Entertainment
Stir crazy: Noel Fielding in 'Luxury Comedy 2: Tales from Painted Hawaii'
comedyAs ‘Luxury Comedy’ returns, Noel Fielding on why mainstream success scares him and what the future holds for 'The Boosh'
Life and Style
Flow chart: Karl Landsteiner discovered blood types in 1900, yet scientists have still not come up with an explanation for their existence
lifeAll of us have one. Yet even now, it’s a matter of debate what they’re for
Arts and Entertainment
'Weird Al' Yankovic, or Alfred Matthew, at the 2014 Los Angeles Film Festival Screening of
musicHis latest video is an ode to good grammar. But what do our experts think he’s missed out?
Sport
New Real Madrid signing James Rodríguez with club president Florentino Perez
sportColombian World Cup star completes £63m move to Spain
Travel
Hotel Tour d’Auvergne in Paris launches pay-what-you-want
travelIt seems fraught with financial risk, but the policy has its benefits
Arts and Entertainment
booksThe best children's books for this summer
Life and Style
News to me: family events were recorded in the personal columns
techFamily events used to be marked in the personal columns. But now Facebook has usurped that
Independent
Travel Shop
the manor
Up to 70% off luxury travel
on city breaks Find out more
santorini
Up to 70% off luxury travel
on chic beach resorts Find out more
sardina foodie
Up to 70% off luxury travel
on country retreats Find out more
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 General

Sustainability Manager

Competitive: The Green Recruitment Company: Job Title: Scheme Manager (BREEAM)...

Graduate Sustainability Professional

Flexible, depending on experience: The Green Recruitment Company: Job Title: T...

Programme Director - Conduct Risk - London

£850 - £950 per day: Orgtel: Programme Director - Conduct Risk - Banking - £85...

Project Coordinator/Order Entry, SC Clear

£100 - £110 per day: Orgtel: Project Coordinator/Order Entry Hampshire

Day In a Page

Noel Fielding's 'Luxury Comedy': A land of the outright bizarre

Noel Fielding's 'Luxury Comedy'

A land of the outright bizarre
What are the worst 'Word Crimes'?

What are the worst 'Word Crimes'?

‘Weird Al’ Yankovic's latest video is an ode to good grammar. But what do The Independent’s experts think he’s missed out?
Can Secret Cinema sell 80,000 'Back to the Future' tickets?

The worst kept secret in cinema

A cult movie event aims to immerse audiences of 80,000 in ‘Back to the Future’. But has it lost its magic?
Facebook: The new hatched, matched and dispatched

The new hatched, matched and dispatched

Family events used to be marked in the personal columns. But now Facebook has usurped the ‘Births, Deaths and Marriages’ announcements
Why do we have blood types?

Are you my type?

All of us have one but probably never wondered why. Yet even now, a century after blood types were discovered, it’s a matter of debate what they’re for
Honesty box hotels: You decide how much you pay

Honesty box hotels

Five hotels in Paris now allow guests to pay only what they think their stay was worth. It seems fraught with financial risk, but the honesty policy has its benefit
Commonwealth Games 2014: Why weight of pressure rests easy on Michael Jamieson’s shoulders

Michael Jamieson: Why weight of pressure rests easy on his shoulders

The Scottish swimmer is ready for ‘the biggest race of my life’ at the Commonwealth Games
Some are reformed drug addicts. Some are single mums. All are on benefits. But now these so-called 'scroungers’ are fighting back

The 'scroungers’ fight back

The welfare claimants battling to alter stereotypes
Amazing video shows Nasa 'flame extinguishment experiment' in action

Fireballs in space

Amazing video shows Nasa's 'flame extinguishment experiment' in action
A Bible for billionaires

A Bible for billionaires

Find out why America's richest men are reading John Brookes
Paranoid parenting is on the rise - and our children are suffering because of it

Paranoid parenting is on the rise

And our children are suffering because of it
For sale: Island where the Magna Carta was sealed

Magna Carta Island goes on sale

Yours for a cool £4m
Phone hacking scandal special report: The slide into crime at the 'News of the World'

The hacker's tale: the slide into crime at the 'News of the World'

Glenn Mulcaire was jailed for six months for intercepting phone messages. James Hanning tells his story in a new book. This is an extract
We flinch, but there are degrees of paedophilia

We flinch, but there are degrees of paedophilia

Child abusers are not all the same, yet the idea of treating them differently in relation to the severity of their crimes has somehow become controversial
The truth about conspiracy theories is that some require considering

The truth about conspiracy theories is that some require considering

For instance, did Isis kill the Israeli teenagers to trigger a war, asks Patrick Cockburn