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
Arts & Entertainment
A stranger calls: Martin Freeman in ‘Fargo’
tvReview: New 10-part series brims with characters and stories

Arts & Entertainment
Shaun Evans as Endeavour interviews a prisoner as he tries to get to the bottom of a police cover up
Review: Second series comes to close with startling tale of police corruption and child abuse
Sport
Raheem Sterling and Luis Suarez celebrate during Liverpool's game with Norwich
football Another hurdle is out of the way for Brendan Rodgers' side
Arts & Entertainment
Schwarzenegger winning Mr. Universe 1969
arts + entsCan you guess the celebrity from these British Pathe News clips?
VIDEO
Have you tried new the Independent Digital Edition iPad app?
News
Portrait of Queen Elizabeth-II by David Bailey which has been released to mark her 88th birthday
peoplePortrait released to mark monarch's 88th birthday
Arts & Entertainment
The star of the sitcom ‘Miranda’ is hugely popular with mainstream audiences
TVMiranda Hart lined up for ‘Generation Game’ revival
Life & Style
The writer, Gerda Saunders, with her mother, who also suffered with dementia before her death
healthGerda Saunders on the most formidable effect of her dementia
Sport
Manchester United manager David Moyes looks on during his side's defeat to Everton
footballBaines and Mirallas score against United as Everton keep alive hopes of a top-four finish
Sport
Tour de France 2014Sir Rodney Walker on organising the UK stages of this year’s race
Arts & Entertainment
Jessica Brown Findlay as Mary Yellan in ‘Jamaica Inn’
TVJessica Brown Findlay on playing the spirited heroine of Jamaica Inn
News
YouTube clocks up more than a billion users a month
mediaEuropean rival Dailymotion certainly thinks so
Arts & Entertainment
The original design with Charles' face clearly visible, which is on display around the capital
arts + ents
Arts & Entertainment
‘Self-Portrait Worshipping Christ’ (c943-57) by St Dunstan
books How British artists perfected the art of the self-portrait
News
People
News
Sir Cliff Richard is to release his hundredth album at age 72
PEOPLE
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
Have you tried new the Independent Digital Edition iPad app?
Independent Dating
and  

By clicking 'Search' you
are agreeing to our
Terms of Use.

iJobs Job Widget
iJobs General

Geography Teacher

£130 - £140 per day: Randstad Education Ilford: Secondary Geography Teacher Lo...

Do you want to work in Education?

£55 - £70 per day: Randstad Education Cheshire: Are you a dynamic and energeti...

SEN Teaching Assistant

Negotiable: Randstad Education Group: SEN TAs, LSAs and Support Workers needed...

Private Client Senior Manager - Sheffield

£50000 - £60000 per annum: Pro-Recruitment Group: The Sheffield office of this...

Day In a Page

Rubin ‘Hurricane’ Carter: The man who could have been champion of the world - and the Bob Dylan song that immortalised him

The man who could have been champion of the world

Rubin ‘Hurricane’ Carter and the Bob Dylan song that immortalised him
Didn’t she do well?

Didn’t she do well?

Miranda Hart lined up for ‘Generation Game’ revival
The Middle East we must confront in the future will be a Mafiastan ruled by money

The Middle East we must confront in the future will be a Mafiastan ruled by money

In Iraq, mafiosi already run almost the entire oil output of the south of the country
Before they were famous

Before they were famous

Can you guess the celebrity from these British Pathe News clips?
Martin Freeman’s casting in Fargo is genius

Martin Freeman’s casting in Fargo is a stroke of genius

Series is brimming with characters and stories all its own
How I brokered a peace deal with Robert Mugabe: Roy Agyemang reveals the delicate diplomacy needed to get Zimbabwe’s President to sit down with the BBC

How I brokered a peace deal with Robert Mugabe

Roy Agyemang reveals the delicate diplomacy needed to get Zimbabwe’s President to sit down with the BBC
Video of British Muslims dancing to Pharrell Williams's hit Happy attacked as 'sinful'

British Muslims's Happy video attacked as 'sinful'

The four-minute clip by Honesty Policy has had more than 300,000 hits on YouTube
Church of England-raised Michael Williams describes the unexpected joys in learning about his family's Jewish faith

Michael Williams: Do as I do, not as I pray

Church of England-raised Williams describes the unexpected joys in learning about his family's Jewish faith
A History of the First World War in 100 moments: A visit to the Front Line by the Prime Minister's wife

A History of the First World War in 100 moments

A visit to the Front Line by the Prime Minister's wife
Comedian Jenny Collier: 'Sexism I experienced on stand-up circuit should be extinct'

Jenny Collier: 'Sexism on stand-up circuit should be extinct'

The comedian's appearance at a show on the eve of International Women's Day was cancelled because they had "too many women" on the bill
Cannes Film Festival: Ken Loach and Mike Leigh to fight it out for the Palme d'Or

Cannes Film Festival

Ken Loach and Mike Leigh to fight it out for the Palme d'Or
The concept album makes surprise top ten return with neolithic opus from Jethro Tull's Ian Anderson

The concept album makes surprise top ten return

Neolithic opus from Jethro Tull's Ian Anderson is unexpected success
Lichen is the surprise new ingredient on fine-dining menus, thanks to our love of Scandinavian and Indian cuisines

Lichen is surprise new ingredient on fine-dining menus

Emily Jupp discovers how it can give a unique, smoky flavour to our cooking
10 best baking books

10 best baking books

Planning a spot of baking this bank holiday weekend? From old favourites to new releases, here’s ten cookbooks for you
Jury still out on Manchester City boss Manuel Pellegrini

Jury still out on Pellegrini

Draw with Sunderland raises questions over Manchester City manager's ability to motivate and unify his players