Revising the forecasts – reissue of post about Office of Budget Responsibility.

Alan Budd’s job at the Office of Budget Responsibility is to inject realism into the inherited forecasts from Mr Darling’s Treasury.

He inherits some racy forecasts for economic growth. The last government thought the UK economy would sprint to growth of 3-3.5% next year, and stay above 3% for the following two years. The average of independent forecasters think 2.1% is likely in 2011, followed by 2.4% in 2012 and 2.7% in 2013.

There’s a difference in the impact on the government deficit. If the economy grows by 1% more next year that will generate around £6 billion of extra tax revenue, and save maybe £1.5 billion of unemployment and other costs. If the following year the economy grows by another extra 1% roughly the same favourable improvements occurs, taking the cumulative total to £15 billion. Go on like that for long and you will be talking serious money.

Turn it round, and it means that the new government may have to say the prospective deficit in 2011 will be several billions higher, and the 2012 one worse still compared with the current forecast.

When I wrote the Economic Policy Review I commissioned a paper which looked at the long term growth rate of the UK economy. Labour had recently hiked it to an unbelievable 2.75%. We concluded it was more likely to be below 2% once the debt bubble was blown away. It is true there is a big downturn to recover from, but it seems very unlikely that the long term rate of growth is anything like 2.75%, which in turn makes it unlikely we can enjoy three years of growth above 3%.
The only thing that could change that is aggressively to set out to make the UK the best place for jobs and business in the developed world by following pro enterprise tax and regulatory policies.

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5 Comments

  1. Bill
    Posted June 14, 2010 at 7:26 am | Permalink

    I just hope that the government seizes the opportunity in the upcoming budget to make significant reductions to public spending and, so far as possible with EU constraints, defines the UK the most business friendly environment that it’s possible to make it.

    There will never be a better time to lay out the cuts, or indeed tax rises, there will never be a second honeymoon period, never be a second time to project them as Labour’s cuts.

    In addition the coalition is probably as strong now as it will ever be.

  2. Bill
    Posted June 14, 2010 at 8:26 am | Permalink

    I just hope that the government seizes the opportunity in the upcoming budget to make significant reductions to public spending and, so far as possible with EU constraints, defines the UK the most business friendly environment that it’s possible to make it.

    There will never be a better time to lay out the cuts, or indeed tax rises, there will never be a second honeymoon period, never be a second time to project them as Labour’s cuts.

    In addition the coalition is probably as strong now as it will ever be.

  3. Andrew gately
    Posted June 14, 2010 at 12:52 pm | Permalink

    Great analysis John and it shows exactly the problems inherited from the previous government and why the tax the rich policy favoured by the Unions will not work.

  4. Javelin
    Posted June 15, 2010 at 12:20 am | Permalink

    Before the election 2.5% if growth came from the Public sector. Barely a blip.

    Now we are supposed to be cutting £150 bn (the currently revised figure I guestimated on this blog for 4 months). From the £150bn cuts I predict a downward dip into negative territory. But I only think George will be able to cut £50 bn for various reasons so growth will be below 1%. I also think gilts will push up becaise serious questions will be raised about Georges political and contractual scope.

    I had a barbeque at my house on Sunday and one of the guys there contributed to the contracts to the outsourcer who runs 2/3rds of the NHS budget. He said it was more expensive to get out the contract than stay in it. If you look at public sector redundacy pay it is huge as well (10s of £k).

    I also think inflation will return as an import and push up prices and wage demands. We will be hit by inflation from the BRIC countries and falling GDP. Interest rates wil be forced up and growth will fall further.

  5. christina sarginson
    Posted June 15, 2010 at 12:44 pm | Permalink

    Sorry but this sounds very much like the same old thing. I am desparate to see the UK grow and businesses florrish but I am seeing a lot of talk and blame need to see more action.

  • About John Redwood


    John Redwood won a free place at Kent College, Canterbury, and graduated from Magdalen College Oxford. He is a Distinguished fellow of All Souls, Oxford. A businessman by background, he has set up an investment management business, was both executive and non executive chairman of a quoted industrial PLC, and chaired a manufacturing company with factories in Birmingham, Chicago, India and China. He is the MP for Wokingham, first elected in 1987.

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