Revised growth forecasts more realistic – PwC

REVISED predictions on economic growth are a more realistic reflection of the state of the economy, according to advisors in the Midlands.

Fiscal watchdog, the Office for Budget Responsibility said growth predictions from the last Labour government were overly optimistic.

It said that rather than growth of 3-3.5%, it was more likely that the economy would grow by around 2.6-2.7% next year.

There were fears that the loss in revenue to the Treasury due to the mismatched figures could result in the new government having to make even further cutbacks in order to reduce the budget deficit.

However, the OBR said it was likely the situation would be alleviated by the government not having to borrow as much as previously thought.

Mark Smith, regional chairman at PricewaterhouseCoopers, Midlands, said: “We agree with the judgement of the OBR that previous Treasury forecasts of economic growth were overly optimistic from 2011 onwards.

“Their new forecast of 2.7% average GDP growth in 2011-14 is in line with our own view.”

PwC said it supported the view that despite lower projected GDP growth, estimated public borrowing in cash terms would be lower than forecast in the March Budget.

It said this reflected a lower out-turn for public borrowing in 2009/10 and the fact that in some areas, such as future unemployment trends, the OBR was now making more optimistic assumptions than used in previous Treasury public finance projections.

However, it said estimates of the structural budget deficit, which are considered more important in driving fiscal policy decisions, have been revised up from 7.3% of GDP in 2010/11 in the March 2010 Budget to 8% of GDP in the latest OBR forecasts.

Mr Smith said that furthermore, part of this difference was expected to persist, with the structural deficit in 2014/15 now being projected by the OBR at 2.8% of GDP compared to 2.5% of GDP in the March 2010 Budget.

“To achieve the same structural budget deficit projection for 2014/15 as before would only require a relatively small additional fiscal tightening in the emergency Budget of around 0.3% of GDP, or around £4 billion at today’s GDP values,” said Mr Smith.

“However, the new Chancellor may decide to tighten fiscal policy by more than this in the emergency Budget on June 22 in order to accelerate the reduction of the structural deficit over the course of this Parliament.

“This would reduce the chances of an adverse bond market reaction and allow both short and long term interest rates to remain lower than would otherwise be the case. It would also put the public finances in better shape to face the longer term fiscal challenges posed by an ageing population, as highlighted in the OBR’s report.”

Richard Lambert, left, CBI Director-General, said the OBR’s report injected a “welcome dose of credibility and transparency” into the fiscal and economic growth projections.

“The forecasts for economic growth and the deficit are now in line with our own, and confirm the view that the recovery will be slow and protracted,” he said.

He continued: “The OBR’s data suggest the underlying public finance position is worse than previously thought. The bigger structural deficit will require tougher action by the Government to balance the books at next week’s Emergency Budget.

“We believe this should be achieved through radical public service reform and spending restraint, rather than tax rises which would hurt businesses and consumers.”