Osborne's plans will be derailed by sluggish growth warns think tank

Published on Sunday 10 July 2011 23:08

BRITAIN will suffer from "sluggish" growth until the start of 2015, causing the government to miss its goal of eliminating the bulk of the Budget deficit within the current parliament, a key forecasting group warns today.

The London-based Centre for Economics and Business Research (CEBR) argues that not only will the UK economy expand at a much slower rate this year, but it will also be caught in a trap of anaemic growth for the following three years as both investment and export growth slows.

This would seriously endanger the government's deficit reduction programme, the think tank says, and it has accused both Chancellor George Osborne and the Office for Budget Responsibility (OBR) of underestimating the amount of time needed to balance Britain's books.

Scott Corfe, CEBR economist and the main author of today's report comments: "The Budget deficit will decline, but nothing like as fast as the OBR has been projecting and therefore…the Chancellor will miss his target of eliminating the Budget deficit within the current parliament."

The group has revised its expectations for GDP output for this year to just 1.2 per cent - well below the OBR's 1.7 per cent forecast - while it estimates growth in 2012-2014 will be below 2 per cent.

This would result in a four-year GDP average of just 1.8 per cent compared to the OBR's expected 2.6 per cent average over the period from stretching from 2011 to 15.

If the CEBR's forecasts turn out to be correct, the budget deficit in the fiscal year 2015-16 is likely to be 25 billion higher than expected by the government.

Public sector net borrowing will also be 25bn up on the 29bn anticipated by the OBR. Douglas McWilliams, chief executive of CEBR, said: "The need to hold down the UK's public spending is likely to be a problem that lasts for at least a generation as we struggle to rein back the excesses of the last six years and catch up with the new world that is appearing in front of our faces."

Today's report is likely to reignite calls for a "plan B" on the economy as opposition politicians and several influential economists warn the depth and speed of austerity cuts will endanger Britain's recovery.

The CEBR argues that investment is likely to be hampered by conservative bank lending policies and caution on the part of large corporates as the economy wavers.

"The combination of the shocks to the banks in the financial crisis, with much more onerous regulatory requirements for banking, mean that banks will not be in the mood for a rapid expansion of lending and they will also be constrained to ensure that they hit the much stiffer targets required for capital and cash adequacy," the report says.While the export growth has been relatively healthy in recent months, the CEBR believes that UK manufacturers will struggle against rising competition from abroad.

"In the increasingly competitive commercial world of the next decade, Britain's exporters will have to run fast to stand still and are unlikely to achieve the very rapid growth assumed by the OBR," the report says.

"In turn, more sluggish export growth and investment growth will feed through in less rapid growth of disposable income and hence consumer spending."