–But Lower Growth Fcasts May Have Limited Impact On Fiscal Plans

LONDON (MNI) – The official UK growth forecasts look set to be
lowered, and borrowing projections raised, ahead of the June 22 budget
by the newly formed Office for Budget Responsibility (OBR).

Analysts say, however, that the impact on fiscal policy of the
changed projections is likely to be muted. The government is focusing on
tackling the structural budget deficit, which is not sensitive to small
changes in projected nominal GDP, and in any event the cuts in the
growth forecasts may not be that large.

The newly formed Conservative/Liberal Democrat coalition
government, launching the independent OBR, argued it would remove the
risk of political interference in the UK’s growth and borrowing
forecasts.

The current Treasury growth forecasts for 2011 onwards are above
consensus. With the new administration committed to increasing the pace
of fiscal tightening, which should dampen near-term growth, these
forecasts look sure to be lowered.

The Treasury’s forecasts in the March budget were for UK GDP of 1
to 1.5% in 2010, 3 to 3.5% in 2011 and 3.25% to 3.75% in 2012. This
contrasted with the average independent forecast in the Treasury’s own
survey at the time of the budget of 1.3% for 2010 and 2.1% for 2011.

While this year’s Treasury growth forecast was not out of line
with consensus, the top end of its 2011 forecast range was above any
independent forecast in its own survey.

In opposition the Conservatives pledged to remove the bulk of the
structural budget deficit over the lifetime of the next parliament.

“The structural deficit won’t be sensitive to small changes in
GDP,” David Page, economist at Investec, said.

With the focus on the structural deficit the administration should
be able, in theory, to avoid the trap of “chasing its tail” – engaging
in more aggressive fiscal tightening to counter less robust than
previously expected growth.

Page adds, however, that while the government may highlight the
structural deficit, markets tend to focus on the non-structural GDP
numbers. In practical terms, cutting the structural deficit is only an
interim target to getting the headline deficits down.

Carl Emmerson, deputy director at the influential Institute for
Fiscal Studies, said the IFS’ estimate was that the new administration,
in order to meet its fiscal goals, needed to come up with a public
finance repair job equivalent to 4.8% of GDP.

As a rule of thumb, a cut of 1 percentage point to GDP through the
forecast period would add 0.7 percentage points to that 4.8% gap.

The OBR could, however, assume that by cutting the deficit more
aggressively than previously predicted in the near term, this will
bolster medium term growth.

In that case, a cut in near-term growth prospects would not
necessarily result in the need for much more aggressive fiscal
tightening further ahead.

Ross Walker, economist at RBS, said the creation of the OBR and a
clear commitment to accelerated deficit reduction, could indeed support
the medium term growth outlook, by supporting credit flow and bolstering
confidence.

Near term, however, more aggressive fiscal tightening than
previously factored in may have a net dampening effect on growth.

The analysts all pointed out, however, that at least prior to the
credit crisis the problem has not been with the Treasury’s growth
forecasts but with its borrowing forecasts.

The Treasury, despite allegations of political interference, has
often proved more accurate on growth outturns than the consensus. It has
tended, however, in recent years to overestimate its revenues for any
given level of growth.

OBR To Rely On Treasury Data; Review Assumptions

The OBR is not going to create a whole new forecast model to rival
that of the Treasury.

It will look at the assumptions the Treasury has made on revenue
projections and the like but will not be re-running the whole forecast
process.

A Treasury spokesperson said the OBR currently has just 11 staff,
including Alan Budd himself, who is a former top Treasury official and
Bank of England Monetary Policy Committee member. He said the OBR would
take Treasury data and analysis and look at the assumptions the Treasury
has made in the past.

Time is also going to be short – with Budd saying Monday it would
produce the forecast assessment before the June 22 budget.

Treasury ministers, nevertheless, are clearly expecting some cuts
to the growth forecasts.

In a BBC radio interview Chief Secretary to the Treasury David Laws
said “If we look … at the growth forecasts that were made in
the last Budget … you can see that for the next few years they are
very significantly higher not only from the estimate that we might want
to come up with now, but of those of all of the market forecasters.”

–London newsroom: 4420 7862 7491 email: drobinson@marketnews.com

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