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
Start your day with The Independent, sign up for daily news emails
Have you tried new the Independent Digital Edition apps?
ebooks
ebooksAn introduction to the ground rules of British democracy
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

Recruitment Genius: Massage Therapist / Sports Therapist / Physio / Osteopath

£12000 - £24000 per annum: Recruitment Genius: An opportunity has arisen for o...

Recruitment Genius: Account Manager / Sales Executive - Contract Hire

£35000 - £60000 per annum: Recruitment Genius: This industry leader provides c...

Recruitment Genius: Project Coordinator

£28000 - £30000 per annum: Recruitment Genius: A Project Coordinator is requir...

Recruitment Genius: Area Sales Manager - Midlands

£20000 - £25000 per annum: Recruitment Genius: This is an exciting opportunity...

Day In a Page

John Palmer: 'Goldfinger' of British crime was murdered, say police

Murder of the Brink’s-MAT mastermind

'Goldfinger' of British crime's life ended in a blaze of bullets, say police
Forget little green men - aliens will look like humans, says Cambridge University evolution expert

Forget little green men

Leading evolutionary biologist says aliens will look like humans
The Real Stories of Migrant Britain: An Algerian scientist adjusts to life working in a kebab shop

The Real Stories of Migrant Britain

An Algerian scientist struggles to adjust to her new life working in a Scottish kebab shop
Bodyworlds museum: Dr Gunther von Hagens has battled legal threats, Parkinson's disease, and the threat of bankruptcy

Dying dream of Doctor Death

Dr Gunther von Hagens has battled legal threats, Parkinson's disease, and the threat of bankruptcy
UK heatwave: Temperature reaches 39.8 degrees on Central Line - the sweatiest place in London

39.8 degrees recorded on Tube

There's hot (London) and too damn hot (the Underground). Simon Usborne braved the Central line to discover what its passengers suffer
Kitchens go hi-tech: From robot chefs to recipe-shopping apps, computerised cooking is coming

Computerised cooking is coming

From apps that automatically make shopping lists from your recipe books to smart ovens and robot chefs, Kevin Maney rounds up innovations to make your mouth water
Jessie Cave interview: The Harry Potter star has published a feminist collection of cartoons

Jessie Cave's feminist cartoons

The Harry Potter star tells Alice Jones how a one-night stand changed her life
Football Beyond Borders: Even the most distruptive pupils score at homework club

Education: Football Beyond Borders

Add football to an after-school homework club, and even the naughtiest boys can score
10 best barbecue books

Fire up the barbie: 10 best barbecue books

We've got Bibles to get you grilling and smoking like a true south American pro
Wimbledon 2015: Nick Bollettieri - Junk balls and chop and slice are only way 5ft 1in Kurumi Nara can live with Petra Kvitova’s power

Nick Bollettieri's Wimbledon Files

Junk balls and chop and slice are only way 5ft 1in Kurumi Nara can live with Petra Kvitova’s power
Ron Dennis exclusive: ‘This is one of the best McLaren teams ever – we are going to do it’

‘This is one of the best McLaren teams ever – we are going to do it’

Ron Dennis shrugs off a poor start to the season in an exclusive interview, and says the glory days will come back
Seifeddine Rezgui: What motivated a shy student to kill 38 holidaymakers in Tunisia?

Making of a killer

What motivated a shy student to kill 38 holidaymakers in Tunisia?
UK Heatwave: Temperatures on the tube are going to exceed the legal limit for transporting cattle

Just when you thought your commute couldn't get any worse...

Heatwave will see temperatures on the Tube exceed legal limit for transporting cattle
Exclusive - The Real Stories of Migrant Britain: Swapping Bucharest for London

The Real Stories of Migrant Britain

Meet the man who swapped Romania for the UK in a bid to provide for his family, only to discover that the home he left behind wasn't quite what it seemed
Cheaper energy on the way, but it's not all sunshine and rainbows

Cheaper energy on the way, but it's not all sunshine and rainbows

Solar power will help bring down electricity prices over the next five years, according to a new report. But it’s cheap imports of ‘dirty power’ that will lower them the most