Cut in IMF forecast for UK growth puts Darling in breach of key fiscal rule

The Government's forecasts for the economy are looking increasingly "foolish" and its key fiscal rules are about to be broken, according to some of the most respected independent observers of the scene.

Martin Weale, the director of the National Institute of Economic and Social Research (Niesr), said that the latest IMF forecast for UK economic growth, of 1.6 per cent this year and next, would have "rather nasty" effects on the public finances and warned that the Chancellor, Alistair Darling, "could easily look extremely foolish" if he sticks to his Budget forecasts.

The Niesr says that the slowdown forecast by the IMF would leave a "hole" of £3.5bn in this tax year, and one of "£6bn to £7bn" over 2009-10. At that point the Sustainable Investment Rule, whereby net public debt is limited to 40 per cent of the national income, would be breached.

The respected Institute for Fiscal Studies (IFS) agreed: "Our estimation is that borrowing could be around £3bn higher than planned, which would eliminate what little room for manoeuvre the Government had, based on their Budget forecast", said Emma Tetlow, a research economist at the institute.

Should unemployment tick up and spending on welfare benefits increase, the IFS foresees "further pressures" on the public finances. The IFS adds that the Golden Rule, whereby the budget balances over the economic cycle, is also in jeopardy. Only if the cycle that began, according to the Treasury, in 2006 lasts until 2014 will that rule also be met.

In its World Economic Outlook, the IMF reduced its growth forecast for the UK to 1.6 per cent in 2008 and in 2009, the weakest for more than a decade.

The IMF commented that "lagged effects of the 2007 monetary tightening, a turning in the house price cycle and the financial turbulence are projected to slow activity, despite monetary policy easing. Only a moderate recovery is foreseen for 2009."

Indeed Niesr says the IMF figures imply annualised growth of as little as 0.1 per cent during the second, third and fourth quarters of 2008 – close to recession.

Mr Darling said: "The IMF has downrated every country's growth forecast. However, they have lowered their expectations in relation to us by less than other countries. [Our economy] has proved remarkably resilient."