Analysis: Some change of tactics but still little sign of a change of tack aboard the sinking ship

LET’S look on the bright side: yesterday’s forecast for UK growth by the Office of Budget Responsibility (OBR) was marginally less pessimistic than the OECD’s. The OECD forecast was for 0.5 per cent growth next year.

The OBR predicts 0.7 per cent.

Earlier in the month, the Bank of England forecast a sharp decline in inflation. The OBR concurs. It expects inflation to fall to 2.7 per cent next year and will almost hit the Bank’s target of 2.1 per cent by 2013.

So much for the good news. The rest is unremitting gloom. Contrast this with where we were a year ago. The OBR June 2010 forecast was that the economy would grow by 2.3 per cent in 2011 and average 2.8 per cent for the next four years. Yesterday’s forecast was for 0.9 per cent in 2011 and 0.7 per cent in 2012, before a somewhat miraculous recovery to an average of 2.7 per cent for the next four years.

The source of this medium-term optimism seems very doubtful. It is driven by a return to normal growth in consumer spending and a massive increase in private investment, averaging more than 10 per cent each year for the next four years. This is difficult to reconcile with the current mood of consumers and the business community.

None of this is good news for public-sector debt. Again, the OBR has drastically changed its outlook. Slower growth reduces tax revenues and increases social security payments. Hence the borrowing outlook is much less rosy than it was a year ago.

Assumptions the Chancellor made last year about how quickly the deficit could be eliminated were wildly optimistic. They were based on the OBR optimism. There is no sign of a change of strategy, however. This is a bit like a captain deciding to set the same course even though he realises his ship is not where he assumed it to be.

However, there are some changes of tactics. There will be a concerted effort to drive growth by reallocating funding to infrastructure and enterprise. The government is also implicitly acknowledging that quantitative easing is not channelling credit to those parts of the economy that need it most. Hence the credit-easing scheme to make £20bn guaranteed credit available to small businesses over the next two years. There are also moves to change employment law.

There will be further downward pressure on public-sector wages and an investigation into how public-sector pay can be made more responsive to local labour market conditions. And around £1bn has been found to effectively reinstate a Labour policy to help the young unemployed find a job.

These measures seem tinged with panic. Clearly, the OBR got its sums massively wrong last year. If it had taken a more sober view, the focus on growth could have started much earlier.

When the economic outlook is so uncertain, this is an error that the economy can ill afford.

• David Bell is professor of economics at Stirling University.