Economists expect no let up on Osborne fiscal squeeze

As chancellor George Osborne puts the final touches to his Autumn Statement, signs of renewed vigour in the UK economy have given him more room to manoeuvre, though economists expect no let up of his fiscal squeeze.

Economists are expecting the Office for Budget Responsibility (OBR) to upgrade its growth forecasts for the UK economy. This comes after the OBR cut its estimates for GDP growth to 0.6 per cent for this year and 1.8 per cent for 2014, down from the previous December’s forecasts of 1.2 per cent and 2 per cent respectively.

Simon Ward, chief economist of Henderson Global Investors, called the OBR’s move “very badly timed”, coming as it did as the UK economy was starting to pick up strongly. “It’s a bit embarrassing for them and they will have to announce a significant upward revision,” he said.

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Most people expect the OBR to forecast UK growth of approximately 1.5 per cent for 2013, said Mr Ward. He said he expected growth of closer to 2 per cent. The key judgement for the OBR, he added, is if this improvement in growth represents something structural in the economy. “The key thing of interest is what they say about longer term growth prospects,” he said. This would be good news for the chancellor and give him more scope for spending.

But the odds are that the OBR will be “relatively cautious” and take the view that the better economic performance is more about the recovery happening earlier than expected than improved longer term prospects for the economy, said Mr Ward.

Samuel Tombs, UK economist at Capital Economics, expects the OBR to revise its UK growth forecasts by up to 1 per cent for 2013 and 2014. This will translate into lower public borrowing forecasts by the OBR: “Over the next five years we think borrowing could be £100bn lower than it forecast back in March,” he said.

Mr Tombs disagreed that the OBR’s downward revisions in March were embarrassing for the government body. “Very few economists saw the upturn coming. Given what we knew at that point, the OBR was not taking an extreme view in March.

“In the past it has had to revise down its forecasts. It will be a rare occasion for it to present a rosier picture.

“The key question is how the chancellor responds to this windfall,” said Mr Tombs. He thinks Mr Osborne will sanction a small giveaway to households of roughly £3bn. However, Mr Osborne is unlikely to do anything more substantial until the Budget next March, in spite of being under pressure from his party. “There’s still a substantial fiscal squeeze set to be delivered to the economy during the next few years,” cautioned Mr Tombs.

Ian Kernohan, economist of Royal London Asset Management, agreed that beside a few headline grabbing measures such as the widely trailed plan to reduce energy bills, the chancellor’s deficit reduction strategy will remain “pretty much unchanged”.