Today we are told the OBR will produce far worse forecast figures for growth and borrowing. That will come as no surprise to readers of this blog. I have argued for the last four years, from the Economic Policy Review onwards, that the trend rate of growth of the UK is now around 1.5%, not the 2.35% official forecasts assume. I am sticking with my forecast of 7.5% growth for this Parliament. Expect OBR to come down closer to this from their 13% plus forecast.
That’s why I have assumed £520 billion of extra borrowing this Parliament, compared to the £451 billion June 2010 official forecast, and the £485 bn revised forecast in March 2011. What today will confirm is that the official June 2010 forecast, their Autumn 2010 forecast and their March 2011 forecast were all wrong, by their own admission. Today’s is likely to be closer to the truth because it will be more pessimistic.
The problem that poses for the government relates to the structural deficit. The government has promised to eliminate this. It has said it will not eliminate the cyclical deficit, the bit that rises and falls according to growth, unless and until there is enough growth. If the OBR now thinks the trend growth, the reliable growth over a period of years, is lower, the structural deficit must be higher. They will probably say less of the borrowing each year will automatically disappear as the economy picks up. That makes the task tougher.
I doubt there will be many interviewers asking why the OBR got it so wrong for so long. If some of us without their resources for forecasting could see the post credit crunch world with a looming Euro crisis would mean slower growth, why couldn’t they with all their money and advantages?