–Repeats Item 1st Transmitted At 1658 GMT
–OBR Founder Dicks Says OBR Doesn’t Really Believe Spare Capacity Rose
Sharply Following Q4 GDP Plunge
–Pace Of Fiscal Tightening Predicted Little Changed After Budget

LONDON (MNI), Mar 23 – A fiscally neutral Budget implies little
overall impact on monetary policy, but should near-term economic growth
live up to the Office for Budget Responsibility’s latest forecast then
it could persuade the Bank of England to raise the Bank Rate in May.

Chancellor of the Exchequer George Osborne’s first full Budget saw
a swathe of crowd pleasing measures on tax, including an unexpected two
pence cut in corporate tax, a cut in fuel duty and a rise in the
personal tax allowance for the next two years. All these giveaways,
though, were fully funded by a hefty tax hike on North Sea oil among
other measures.

Overall the planned fiscal tightening forecast by the OBR seen
today is broadly similar to that seen in its November forecast and
represents one of the largest squeezes of any Western country, with only
Ireland and Iceland going further.

Borrowing from 2012 onwards is set to be around Stg10 billion
higher than forecast in November, not a huge amount given the overall
size of the deficit these days, with the increase largely reflecting
higher inflation and also a lower growth forecast over 2011 and 2012.

While growth has been revised down to 1.7% for 2011 from the 2.2%
forecast in November, the OBR is expecting to see quite a sharp
bounceback in growth in the first quarter of this year, a rise of 0.8%
on the quarter.

Growth in Q4 2010 was hit by poor weather with output down 0.6% on
the quarter with National Statistics estimating that even without the
poor weather growth would have only been flat.

While a 0.8% rise in Q1 would only imply a small rise in growth
over the past two quarters combined, a return to growth could well be
enough to persuade a majority of Monetary Policy Committee members to
vote for a hike.

“I think a 0.8% figure for Q1 GDP is pretty close to what the
Bank of England are assuming and I think it would be sufficiently strong
for them to still go ahead and deliver a rate hike in May,” said Philip
Rush, economist at Nomura.

“I suppose 0.4% of that is just a normalisation of the weather
effects in Q4 and still indicative of fairly strong underlying growth,”
he added.

Minutes of the March BOE MPC meeting published earlier Wednesday
showed that three members continued to vote for tighter policy while six
remained in favour of no change. Adam Posen once again argued for a
further expansion in quantitative easing.

Still a number of those six who favoured no change in rates seem
resigned to the fact that rates will go up, but it is a question of
when.

With inflation rising once again in March to its highest level
for two and half years, a decent bounceback in growth in Q1 could well
push them to vote for a hike at the May gathering, the first meeting
when the Q1 GDP data will be known.

Geoffrey Dicks, a founder member of the Budget Responsibility
Committee, was however sceptical that a 0.8% GDP rise in Q1 would
definitely push the MPC to take immediate action in May.

“I think 0.8% is on the margin: 0.5% is definitely no rate hike, 1%
and you might get one in May, but 0.8% is very much the judgement call.”

Dicks added that he felt there could easily be a 1% quarterly rise
in GDP in Q1.

While the OBR revised up sharply its Q1 growth forecast in response
to the Q4 drop, it has been careful not to add all of this lost
growth onto the back end of the forecast period with growth in 2014 and
2015 revised up by only 0.1 percentage point.

Dicks argued that while the OBR has seen there is more spare
capacity in the economy as a result of the Q4 downturn and revised up
the output gap by 0.5 percentage point, it has decided not to use all
that spare capacity in the forecasts.

“They have done a sensible thing. They have said there is more
spare capacity but they are not going to use it, or at least they are
only going to use a weeny bit of it in their forecast.”

“Essentially what they are saying is what we lost in Q4 and Q1…I
think they will eventually say that is gone for good,” Dicks said.

One of the dangers to the current profile for the public finances
is the rather optimistic growth forecasts further out from 2013 onwards
with output set to rise by nearly 3% from then until 2015.

It wouldn’t take a much weaker growth profile to knock Osborne’s
plans to get the structural deficit to zero into touch.

Even if growth does perform as well as forecast whether Osborne
will succeed in cutting spending at as sharp pace as he plans is yet to
be seen.

–London newsroom: 4420 7862 7492; email: ukeditorial@marketnews.com

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