Tags: Osborne | UK | Growth | Forecast

Osborne Cuts UK Growth Forecast as Wider Deficit Seen

Wednesday, 05 Dec 2012 12:38 PM

 

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Chancellor of the Exchequer George Osborne unveiled a cut in the government’s economic growth forecasts and said the budget deficit will take longer to tame than he originally planned.

Forecasts from the nonpartisan Office for Budget Responsibility show the economy will shrink 0.1 percent this year instead of the 0.8 percent growth predicted in March, and expand 1.2 percent next year instead of 2 percent, Osborne said in his autumn statement to Parliament. Debt as a percentage of gross domestic product won’t start falling until the 2016-17 fiscal year, he said.

The announcement leaves Osborne open to attacks from the opposition Labour Party, which says he is damaging the economy by trying to cut the deficit too quickly. The chancellor is already struggling to rebuild his reputation after a decision to cut income taxes for the highest earners in his March budget and a series of policy U-turns cost his Conservative Party support with voters.

“While our deficit is forecast to go on falling, instead of taking three years to get our debt falling, it’s going to take four,” Osborne said. “Some say we should abandon our deficit plan, and try to borrow more. They think by borrowing more, they can borrow less. That would risk higher interest rates, more debt interest payments and a complete loss of Britain’s fiscal credibility.”

Growth Forecasts

Osborne also unveiled growth forecasts of 2 percent in 2014, and 2.3 percent the year after, with further acceleration to 2.7 percent in 2016. The debt-to-GDP ratio will peak at 79.9 percent in 2015-16, and will then start to decline in following years, he said.

Osborne’s 2010 effort to rid Britain of a record budget deficit has been blow off track twice since that year as the government has failed to fix underlying problems in the U.K. economy such as an impaired banking system and record levels of household debt.

Fitch Ratings said in September that pressure on Britain’s AAA rating had increased and there was little room to “absorb further adverse economic shocks in light of the U.K.’s elevated debt levels and uncertain growth outlook.” Net debt stood at almost 68 percent of GDP last month, according to the statistics office.

Osborne may be shown tolerance among investors who say letting the debt target slip is preferable to risking the recovery by sharply tightening fiscal policy, providing he demonstrates a commitment to deficit reduction. Ten-year U.K. government bonds currently pay just 1.8 percent, a third of the yield on similar-maturity Spanish debt.

“Yes, the deficit is still far too high for comfort,” he said. “We cannot relax our efforts to make our economy safe. But Britain is heading in the right direction.”

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