Public-sector job losses to be 160,000 fewer than feared, says OBR

Office for Budget Responsibility boosts government with optimistic growth prediction and says it has more than 50% chance of achieving deficit goals
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• Julia Kollewe
• guardian.co.uk, Monday 29 November 2010 15.08 GMT
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Firefighters at a meeting of the Fire Brigades Union in November, to discuss concerns over public-sector cuts. Photograph: Oli Scarff/Getty Images

 

Public-sector job losses under the government's deficit-cutting plans will be much less punishing than first feared, according to Britain's fiscal watchdog.

The Office for Budget Responsibility (OBR) said details of the government's four-year spending review, published last month, had enabled it to slash its estimate of public-sector job losses to 330,000 from 490,000. However, it believes that the government's policy to freeze public spending in 2015-16 could lead to further job losses of 80,000 that year unless welfare spending is cut further.

"We expect employment growth in the market sector will more than offset cuts in the public sector just as it did in the consolidation of the early 1990s," said the watchdog, which was set up by the chancellor, George Osborne, when he took office in May.
It delivered a further boost to the coalition government by saying that the probability of it achieving its deficit-cutting goals had increased since June.

The OBR cut its growth forecasts for coming years, although it remains markedly more optimistic than other forecasters, including the Organisation for Economic Co-operation and Development. As expected, the OBR upgraded its forecast for growth this year to 1.8% from 1.2% in June, reflecting the economy's surprisingly strong performance in the summer. This matches the OECD's latest prediction.

But for next year, the independent OBR cut its growth estimate to 2.1% from 2.3% – which is far more bullish than the OECD's prediction of 1.7%, and City economists' forecasts. When the OECD, the respected Paris-based thinktank funded by 30 countries, recently revised its estimates, it said the UK government's austerity measures would increase the "headwinds" facing the economy and "hamper growth".

The OBR, headed by Robert Chote, the former Institute for Fiscal Studies chief, is also significantly more optimistic about 2012 when it expects Britain's economy to grow by 2.6%, revised lower from 2.8% in June. This compares with the OECD's prediction of 2% growth.
Hetal Mehta, UK economist at Daiwa Capital Markets, said: "As expected, the recent run of upside surprises on GDP growth has led the OBR to revise up its forecast for 2010.

"The downward revision to 2011 growth is apparently thanks to consumers bringing forward their spending from the first quarter ahead of the VAT hike, although this was known at the time of the June forecast. In any case, it brings the OBR somewhat closer to the consensus, but we feel this is still on the optimistic side at over 2%. We expect growth of 1.6% in 2011," she said.

Douglas McWilliams, chief executive of the Centre for Economics and Business Research, echoed those comments. "We think the OBR is particularly over-optimistic on the consumer-side of the economy ... The key problem – one that seems to be pervasive in Whitehall to judge by these forecasts – is that people in government have no idea what is going on in the real world of business.

"They seem to think that a degree of economic momentum will continue regardless of the circumstances."

The OBR left its estimate for net borrowing this financial year virtually unchanged at £148.5bn (compared with £149bn in June). However, it said the coalition government now had a greater than 50% chance of achieving its deficit goals.
"The government has a slightly wider margin for error in meeting the mandate than appeared likely in June," it said.

It now sees borrowing as a percentage of gross domestic product at 10% this fiscal year, falling to 1.9% by 2014-15. Previously, it had seen the deficit at 10.1% of national output this year, dropping to 2.1% in the next four years.

The body was sanguine about the British contribution to the Irish bailout. "The only element that would score in the public finances would be the £3.2bn bilateral loan," it said. However, this would not affect Britain's borrowing position. "Any profit (on the interest) would reduce public-sector net borrowing. As the timing, duration and interest rate on the loan have not been announced, we could not score it in the current forecasts, but clearly the sums involved are too small to have any material effect on the outlook."
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