John McLaren: Only now could uncertainty offer reassurance

THIS first report by the Office for Budget Responsibility (OBR) marks the start of an intriguing addition to the public-sector economic and fiscal landscape.

It quite rightly highlights the on-going importance of uncertainty.

To ram this point home, it assumes only a 40 per cent probability of GDP growth in 2011 being between 1.5 per cent to 3.5 per cent. A few years ago the probability of this would have been close to 95 per cent.

Beyond this overarching uncertainty, what else does the newly formed OBR have to tell us? First, that as well as being uncertain, GDP growth is likely to be lower than previously forecast by the Treasury.

Significantly lower. With a longer-term growth rate of about 2.75 per cent, rather than the 3.25 per cent previously forecast. Cumulated over time, that 0.5 per cent makes quite a bit of difference.

This reduced growth impacts in turn on public-sector finances. Government receipts are lower as growth is lower, so the borrowing gap narrows more slowly, and GDP grows more slowly, which means that national debt as a share of GDP grows more quickly.

However, the second major change seems to contradict this, as public-sector net borrowing has fallen in comparison to the last Budget report from March 2010. This is because government receipts have stood up better than expected in the downturn.

What does all this mean for the emergency Budget next week, and the proposed cuts? It probably worsens the longer-term prospects, and as such strengthens the coalition's argument that more needs to be done quicker.

For Scotland, the knock-on effects will be felt through the Barnett formula. If, as a result of these more cautious growth estimates, the Government engages in a faster pace of fiscal consolidation, then Scotland will, too.

But the big picture remains highly changeable. For example, using the OBR's fan charts of GDP growth, if by the Spending Review in the autumn such growth in 2011 is expected to be close to 0 per cent, then that paints a very different fiscal picture to one where it is expected to rise by 5 per cent.

• John McLaren is director of the think-tank, the Centre for Public Policy for the Regions.