Gloomy forecasts may mean more public sector cuts

The OECD has now stepped into line with others in downgrading its forecasts for growth for this year and next. In terms of the UK, it now expects GDP growth in 2011 to be 1.4 per cent, almost the same as in 2010, and to increase only to 1.8 per cent in 2012. This is very similar to the latest Bank of England and other UK forecasters’ predictions for 2011 of 1.5 per cent. However, for 2012, it is a little below their forecasts of 2 per cent.

This relatively slow recovery is unusual in the upswing after a substantial recession, when the re-employment of spare capacity tends to result in above-average growth for some time. It suggests the profile of the recession and recovery will continue to tread a path somewhere between that seen in the early 1980s and the 1930s, as opposed to the shallower recessions of the 1970s and 1990s.

These downgraded growth forecasts have been accompanied by a substantial amount of comment on what might be done to stimulate growth. Most commentators have cited a similar plan to try to achieve the ideal solution of a short-term stimulus along with coherent plans for medium-term fiscal austerity, to rebalance governments’ budgetary positions. Such a plan typically involves continued low interest rates, debt restructuring within the euro area, structural reforms (for example over pensions, healthcare and the labour market) and renewed bank lending. Of these, the first is already happening, the second seems unlikely until a final crisis point is reached, and the third will not have any quick impact but will make things easier in the longer term.

The big political question remains whether the UK government might relent on its fiscal austerity programme and introduce a little more of a fiscal stimulus. So far, the government has argued against this and its position is unlikely to change as a result of the OECD’s report. These shifts in expectations involve a risk to the UK – and Scottish – government’s budget, as continued underperformance of GDP could lead to further public sector cuts, in order that the Chancellor can continue to deliver on the current deficit reduction plans.

l John McLaren, is a professor at the Centre for Public Policy for Regions.