The outlook for the economy is “inherently uncertain” and recovery will be slower than after previous recessions, the UK’s tax and spending watchdog has warned.
The Office for Budget Responsibility said the impact of Government deficit-busting measures – which include a hike in VAT to 20% and an £81 billion package of spending cuts – would lead to “sluggish growth” in the medium term.
But the OBR – formed in May to make an independent assessment of public finances and the economy – did slash its projections for public sector job cuts over the next four years from 490,000 to 330,000.
The watchdog’s forecast – which will provide the fiscal framework for the Government’s next budget in March – raised estimates for GDP growth in 2010 from 1.2% to 1.8%, but lowered growth in 2011 and 2012 from 2.3% to 2.1% and from 2.8% to 2.6% respectively.
The OBR’s Economic and Fiscal Outlook report said: “Our central forecast is that the economy will continue to recover from the recession, but at a slower pace than in the recoveries of the 1970s, 1980s and 1990s.
“This relatively sluggish medium-term outlook reflects the gradual normalisation of credit conditions, efforts to reduce private sector indebtedness and the impact of the Government’s fiscal consolidation.”
The OBR said the Government has a “better than 50%” chance of meeting its mandate to reduce the structural deficit – the gap between Government spending and taxes – by 2015-16.
Projections for public borrowing were similar to the OBR’s June forecast, as it slightly lowered its estimate in the current 2010-11 financial year to £148.5 billion from £149.5 billion.
The watchdog also added that as the Government reduced its planned cuts in public services spending, by announcing additional cuts in welfare spending, it expects the number of public sector job losses planned for the next four years to significantly shrink. As growth slows in the near-term, the OBR expects total unemployment to rise to a peak of just over 8% in 2011 – in line with previous forecasts. The watchdog then expects unemployment to fall to just over 6% by 2015.
The OBR also expects the rate of inflation – or cost of living – to be higher in 2010 and 2011 than in its June forecast, but will fall below the Bank of England’s 2% target by 2012, as the effects of the VAT hike fade away.