Written evidence submitted by Roger Bootle,
Managing Director, Capital Economics
There was no surprise in the OBR's increase in the
forecast for GDP growth this year. The significant issues concern
the next two years.
And here the OBR reduced its previous forecast. This
is hardly a vote of confidence in the Government's claim that
the economy is capable of withstanding the looming fiscal squeeze.
I think that even these weaker OBR forecasts are
still too optimistic. (Even so, the OBR forecasts are perfectly
plausible and plenty of private sector forecasters would regard
them as close to being a central case.) Even though UK growth
has recently been stronger than widely expected, the deciding
factors are yet to come into play. They are the looming fiscal
squeeze, the prospect of much weaker house prices and the effects
of the gathering crisis in the euro-zone. The Capital Economics
forecast for GDP growth next year is still only 1%.
Moreover, although the OBR has reduced its estimate
of public sector job losses, the likely outcome is still up in
the air, not least because it depends upon the behaviour of public
sector workers. If they fail to accept the required pay restraint,
then the scale of job losses necessary to hit the planned spending
numbers will be higher. I suspect that the scale of likely job
losses is larger than the OBR's estimate.
As regards the projections for government borrowing,
not only are the OBR's economic growth forecasts still optimistic,
but there are big question marks over whether the cuts in public
spending built into the Government's projections can actually
be achieved. With the OBR's borrowing forecasts largely unchanged
from those made back in June, the fiscal squeeze looks unlikely
to be scaled back intentionally - nor need to be intensified.
Reflecting my more pessimistic view of the economic
outlook, I think that the OBR's projections for government borrowing
and the debt to GDP ratio are too optimistic. But the differences
are not dramatic, particularly in the immediate future. But because
of our forecast that growth will undershoot the OBR's predictions,
the gap widens over time. By 2015-16 the Capital Economics forecast
is that the PSNB will be £50 billion and the debt to GDP
ratio 74% compared to the OBR's figures of £18 billion and
67% respectively. Still, the UK is nowhere near the position of
Greece or Ireland.
Accordingly, the OBR's update does nothing to alter
the fact that the fiscal squeeze will be the defining influence
on the economy over the next few years. And there has been little
in the recent economic news to make me more optimistic about the
ability of the private sector to compensate. This does not mean,
however, that the fiscal squeeze was ill-advised. Without it the
economic outlook might well have been worse.
December 2010
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