Slower UK growth ahead
June 15th, 2010
The Office for Budget Responsibility produced a new and much lower forecast for growth. Out has gone the old government’s heady and unrealistic trend rate of growth of 2.75%. In has come the new age of austerity 2.1% long term rate. The OBR does think the next three years will see a trend of 2.25% growth, with it falling off after that. That means they are not expecting much of a recovery from the big slump of 2008-9. They clearly do not believe the Bank of England’s view that there is loads of spare capacity just waiting for orders for the economy to take off. They have come closer to our view that the trend rate of growth is now below 2%, compared to the post war average of 2.5%.
The OBR also said that the structural or underlying budget deficit is higher than Labour said. They did, however, lower the total deficit forecast for each of the next four years. This change depended on two moves to less caution in the figures. They have firstly decided more VAT will be collected as a proportion of the amounts owing than in recent past experience, and they chose to use the middle of their growth forecast rather than the bottom of the range used in the previous deficit estimate. They also believe that the sharp drop in the budget deficit compared with forecast in the last three months of 2009-10 came mainly from a sustainable increase in Income Tax receipts. They dismiss the idea that most or all of the increase was a one off from people and companies bringing forward income and bonuses ahead of the higher rate of tax for 2010-11. I wonder if they are right.
They do not produce a full balance sheet. They do point out there are £770 billion of unfunded public sector pension liabilities on out of date 2008 figures. The true position must be well in excess of £1 trillion by now. They come up with quite low figures for the off balance sheet liabilities through PFI and PPP, and duck giving a true view of the banking liabilities.
On spending, they reveal that on unchanged policies net pension payments surge from £4 billion in 2010-11 to £9.4 billion in 2014-15. EU net contributions rocket from £3.1 billion in 2008-9 to £10.3 billion by 2014-15, the price of Mr Blair’s bad negotiating. Social security goes up from £169.3 billion in 2010-11 to £192.1 billion by 2014-15, and debt interest from £42.1 billion in 2010-11 to £67.2 billion in 2014-15. These are some of the figures the new government has to seek to curb and control.
