Osborne's Budget 'to fuel growth'

Chart showing growth forecasts

The UK economy will grow more slowly this year than previously forecast, the Chancellor George Osborne has said.

The independent Office for Budget Responsibility (OBR) forecast 1.7% growth in 2011, compared with its previous estimate of the 2.1%.

This is more in line with market analysts' forecasts.

The downgrade was due to slower growth at the end of last year, higher commodity prices and higher-than-expected inflation, Mr Osborne said.

Growth next year would be 2.5%, compared with the previous forecast of 2.6%, and 2.9% in 2013, in line with the last estimate, the chancellor said.

The pound fell on the currency markets immediately following the growth downgrades, but recovered soon after.

Higher borrowing

Delivering his second Budget, the chancellor also revealed that government borrowing would be lower this year than previously thought, but would be higher in subsequent years.

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The extra borrowing is the inevitable consequence of higher inflation and slower growth, which the OBR expects to push up the cost of benefits and debt interest”

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The OBR expects public sector net borrowing to come in at £146bn for the current financial year, slightly less than the previous estimate of £148.5bn.

Figures released this week showed that the total for the financial year to the end of February was £123.5bn.

In the following years, however, borrowing will be higher than previously forecast, at £122bn in 2011-12, against the last estimate of £117bn, £101bn in 2012-13 (compared with £91bn), £70bn in 2013-14 (£60bn), £46bn in 2014-15 (£35bn) and £29bn in 2015-16 (£18bn).

This totals £44.5bn of additional borrowing over the period compared with the previous forecasts.

"The borrowing numbers are a bit higher than expected despite the fact that the Budget is supposedly fiscally neutral," said Jonathan Loynes at Capital Economics.

"And yet they're still dependent on a pretty strong pick up in GDP growth in the next few years. I guess that suggests that the fiscal plans are vulnerable to weaker-than-expected out-turns in the economy."

Chart showing levels of borrowing
'Growth stimulus'

The government is about to embark on a massive programme of spending cuts in order to cut the budget deficit.

As a result of these announced cuts, Mr Osborne said the market interest rate on UK debt was 3.6%.

Other countries that did not address their deficits quickly enough, such as the Republic of Ireland and Portugal, "had seen their debt ratings downgraded and borrowing costs soar", he said.

WATCH: George Osborne opened his second Budget saying he would be "reforming the nation's economy"

"This is our stimulus for economic growth."

Mr Osborne said the government was on course to meet its target of eliminating the budget deficit, which stood at 11.1% of GDP last year, within the next five years.

He said the government's policies had rescued the economy and brought economic stability.

"Without stability, there can be no growth and no new jobs," he said.

Opponents of the cuts argue that they will undermine the stuttering economic recovery and see unemployment rise.

Labour leader Ed Miliband criticised the chancellor for continually downgrading his growth forecasts, which are supplied to him by the OBR. In his first Budget, Mr Osborne said growth in 2011 would be 2.3%, before it was downgraded to 2.1% in November and then to 1.7% in Wednesday's Budget.

Mr Miliband recounted how the chancellor had, he said, set out three priorities for this year: "Growth, growth and growth."

Rising prices

Mr Osborne also revealed that the OBR did not expect the rate of inflation, currently at 4.4%, to drop back to the government's 2% target until 2013 - contrary to the Bank of England's belief that it will fall back during 2012.

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He said inflation would remain at between 4% and 5% this year, compared with the OBR's previous forecast of 2.8%.

He said higher global food prices and the recent rises in the oil price were the main factors behind the rise in inflation.

These external factors are an important reason why the Bank has not increased interest rates - its key weapon in combating rising prices.

Earlier on Wednesday, minutes from the latest meeting of the Bank's rate-setting Monetary Policy Committee revealed that, for the second month in a row, members had voted 6 to 3 in favour of keeping rates on hold at a record low of 0.5%.

The OBR also reviewed its forecasts for unemployment - it now expects the jobless rate to stand at 8.2% this year, compared with 8% in its previous forecast, before falling slightly to 8.1% in 2012 (compared with 7.7%), 7.6% in 2013 (7.2%), 7% in 2014 (6.7%) and 6.4% in 2015 (6.1%).

Chart showing unemployment forecasts

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