2010/11/30

George Osborne sees the road to recovery despite report

New fiscal watchdog warns economic situation is delicately balanced, while Labour says government predictions are overly optimistic
Britain's Finance Minister George Osborne addresses parliament in London
 
George Osborne, centre, told the Commons that he would 'stick to the course' on the economy. Photograph: Reuters
 
George Osborne vowed yesterday to press ahead with spending cuts and tax rises, despite concerns that a report by the government's fiscal watchdog showed the recovery was delicately balanced and could be derailed if exports faltered or unemployment went up faster than expected.

The chancellor, who was accused of not having a plan B, told the Commons he would "stick to the course" following a report by the Office for Budget Responsibility (OBR) that provided both ministers and opposition MPs with ammunition as they debated the fate of the economy.

Osborne said the OBR's independent forecast backed his view that the UK was likely to avoid a double-dip recession next year and grow steadily over the life of the parliament. It said the economy would grow by 1.8% this year – a substantial increase on the 1.2% previously expected, and greater than forecasts by international groups such as the OECD.
Osborne told MPs: "This is an uncertain world but the British recovery is on track. 

Employment is growing, one million more jobs are being created, the deficit is set to fall, the plan is working. So we will stick to the course. That is the only way to help confidence to flourish and growth to return."

The OBR report, made in response to the government's comprehensive spending review, also backed projections by the Treasury that the UK's annual budget deficit would be reduced from one of the highest in the G20 to one of the lowest following five years of austerity.

Osborne said the UK would avoid the fate of Ireland, which has agreed to accept an £85bn bailout, with £7bn from the UK.

The OBR also revised downwards its forecast for the number of job losses in the public sector, from 490,000 to 330,000, after a switch from cuts in Whitehall spending to cuts in welfare payments over the next five years.

But the OBR said growth over the next two years would be less than expected, giving support to opposition claims that austerity measures would hurt the recovery. Critics of the tax and spending plans said the coalition was gambling that exports would rise and businesses would dramatically increase employment to drive Britain out of recession.
Several business groups and City analysts joined the shadow chancellor, Alan Johnson, in calling the OBR's forecasts "overly optimistic" when the world economy was slowing and continental Europe was in the grip of a debt crisis.

Johnson characterised Osborne's approach as a "reckless gamble" that relied too heavily on exports and could lead to a "jobless recovery". He said the chancellor was attempting fiscal tightening at a rate that had only been attempted twice in living memory – both times by countries benefiting from strong growth.

Douglas Alexander, the shadow work and pensions secretary, will warn in a speech today that "In the current economic crisis, no country other than Ireland has attempted to cut so deeply, so quickly," he told MPs. "The chancellor has chosen to take an unprecedented gamble with people's livelihoods and the country's future, and he has done so on the basis of a fundamental deceit that when he assumed office the public finances were worse than expected. …

" The reckless gamble that members opposite support is still to come. The chancellor is in the casino, but he hasn't spun the wheel yet."

Osborne's austerity drive will make the return to pre-recession levels of employment "slower and more painful" than many people expect. With the dole queue shrinking by just 15,000 since the coalition came to power, it could take 15 years before numbers claiming out-of-work benefits drop below one million if present trends continue, he will say.

Most economists have spent the last three months downgrading forecasts for next year after surveys showed a slump in confidence among consumers and businesses. With house prices falling and much of the rise in employment attributed to part-time workers, consumer spending is expected to weaken.

The OBR forecast growth would moderate next year from 2.3% to 2.1%, as exports and business investment slowed.

According to analysts at Cambridge Econometrics, even this forecast was optimistic, while David Kern, chief economist at the British Chambers of Commerce, warned the economy would struggle next year and unemployment was likely rise above the 8% predicted by the OBR.

The TUC general secretary, Brendan Barber, said Osborne "must have missed the forecast showing unemployment little better than static for the next three years". He added: "What is the point of economic policy if it does not include getting people back to work? And while the OBR report is full of uncertainty [about the economy] … George Osborne does not have the plan B any sensible chancellor should."

Osborne, who used his response to the OBR report to announce a review of corporation tax, said borrowing this year was expected to be £1bn less than forecast in June. He added: "On the OBR's central forecast, we will meet our fiscal mandate to eliminate the structural current budget deficit one year early, in 2014-15. And the same is true for our target to get debt falling as a percentage of GDP." Over the forecast period, Osborne said £19bn would be saved in interest payments on the national debt.
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