Investments  

Economists slate OBR’s surplus claim

Economists have given short shrift to Office for Budget Responsibility’s (OBR) predictions the UK will be running a fiscal surplus by 2018-19.

Chancellor George Osborne announced the claims in Parliament last week as he delivered his Budget 2014 speech. He said the UK would, according to OBR figures, have a small budget surplus in the 2018-19 year.

But several economists have poured cold water on this idea, with some saying the prediction of a budget surplus will “vanish” and others claiming the OBR has been “too easy” on the chancellor.

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Keith Wade, chief economist at Schroders, said Mr Osborne (pictured) was “hemmed in” by his borrowing targets and that the predicted GDP slowdown in 2015 reflected the “resumption of austerity with government consumption and investment slowing sharply”.

Mr Wade added he did not think the government would “pursue fiscal consolidation with such zeal” as the figures suggested.

“On our calculations, fiscal tightening is set to increase from just over 0.5 per cent of GDP in 2014-15 to 1.3 per cent of GDP in each of the subsequent three fiscal years,” he said. “Past experience suggests that such consolidation is often promised but never delivered. Growth may be stronger in the near-term as a result, but the budget deficit will not improve and turn into a surplus by 2018-19 as forecast by the chancellor. That prediction, like the old pound coin, looks set to vanish in coming years.”

Simon Ward, chief economist at Henderson Global Investors, said the OBR had “given the chancellor too easy a ride”.

He said the OBR had raised concerns that spare capacity –effectively the potential for the economy to grow – had evaporated and one method of calculation showed actual output above potential output.

“The OBR has discarded the methods it uses to calculate this and while it did provide justification for this, I didn’t find it very convincing,” he said.

Mr Ward said he therefore took a “more pessimistic view” on the economy, meaning his view on there being a budget surplus by 2018-19 was also that it was unlikely.

Julian Chillingworth, chief investment officer at Rathbone Unit Trust Management, said while there had been the “largest reduction in the deficit in the developed world” people should “not get carried away”, given there is “still a large deficit to deal with”.

Neil Williams, group chief economist at Hermes Fund Managers, said fiscal policy played “second fiddle” to monetary policy in the Budget. He said the headline deficits are now lower than planned, but the deficit is “still high” as it is the G7’s highest, excluding Japan.

“While the headline deficit falls on better growth, the structural, less growth-sensitive part of the deficit will fall by less, begging further reform and consolidation,” he added.