OBR to cut estimate of public sector job losses by 90,000

PUBLIC sector job cuts will be less severe than previously expected, the government's spending watchdog will announce today as it unveils a raised growth forecast for the year.

• Peter Spencer: "We've seen an impressive recovery in the economy and particularly in tax revenues"

The Office for Budget Responsibility (OBR), the Treasury's independent forecaster, will reduce its estimate of public sector job losses by 2015 from the projected 490,000 to around 400,000, according to the Ernst & Young Item Club. The OBR, which will also upgrade its 2010 growth forecast, will publish its outlook for the economy today ahead of Chancellor George Osborne's first autumn fiscal statement, at 3:30pm.

The growth and budget figures published by the OBR will form the basis of Osborne's next Budget in March.

The Item Club believes that some 90,000 jobs have been saved by a shift in last month's comprehensive spending review towards deeper cuts in benefit spending and more modest government department reductions than previously expected.

Peter Spencer, chief economic adviser to the Item Club, said: "Buffering government departments will have saved some public-sector jobs, assuming that there will be a similar balance between staffing and procurement costs and a similar rate of wage growth."

But he warned that the savings made in welfare reform would cause a drop in household incomes. "As such, Item also expects the OBR to reduce its forecast for consumer spending growth throughout the forecast period," he said.

Ernst & Young's Scottish Item Club was more downbeat on the employment outlook, however. It said the increase in private sector jobs would not compensate for the 40,000 or more public sector jobs likely to be lost north of the Border over the next five years.

The report warned that the recovery in Scotland would be "joyless" and "jobless", as revealed in Scotland on Sunday yesterday.

But the OBR report out today, the first by Robert Chote, formerly head of the Institute for Fiscal Studies, is likely to give its approval to the government's plans for cutting the budget deficit.

It is expected to raise its 2010 growth forecast and say that the budget deficit will be smaller than it predicted in June. The Item club believes the OBR's forecast for 2010 will be upgraded from its previous prediction of 1.2 per cent to 1.7 per cent or 1.8 per cent, following stronger-than-expected growth in the third quarter.

The economy grew by 0.8 per cent in the three months to the end of September, twice the rate predicted by the OBR.

It will maintain in previous forecast of 2.3 per cent growth in 2011 and may modestly reduce its public borrowing forecast for next year from the current 149 billion, with tax revenues on track to beat the OBR's original forecast by more than 10 billion this year.

Spencer said he was cautiously optimistic on the economic outlook."Since the OBR's forecast in June, we've seen an impressive recovery in the economy and a particularly impressive recovery in tax revenues, which will undoubtedly be reflected in a more optimistic outlook in the OBR's forecast."

The OBR's forecast is below the 2.6 per cent growth predicted by the Bank of England earlier this month. But Howard Archer, chief UK and European economist at IHS Global Insight, questioned the OBR's prediction for next year.

"We suspect that the OBR will stick to its GDP growth forecast of 2.3 per cent for 2011 - while we think that is likely to prove optimistic (we forecast 1.7 per cent), it is certainly not out of the question."