Economists slash growth forecasts and warn of 'headwinds' facing UK

A LEADING think-tank has slashed growth predictions for the UK next year, in the wake of "substantial but necessary" deficit-busting measures.

The Organisation for Economic Co-operation and Development (OECD) welcomed the spending cut proposals for reducing fiscal risk, but said that they would increase "headwinds" facing the economy in the short term.

It cut its forecast for next year to 1.7 per cent from 2.5 per cent previously.

The group also warned of downside risks to growth, as falling house prices and the government's austerity measures could have an impact on household spending.

It said: "The substantial but necessary fiscal tightening and weak real income growth create headwinds, and growth is projected to remain subdued in 2011.

"The recovery will gain a bit more momentum in 2012, when exports are expected to increase further and business investment to grow more robustly."

The Paris-based group raised its forecast for this year after recent surprisingly robust figures and is pencilling in growth of 2 per cent in 2012.

Its expectations for 2011 are lower than the 2.3 per cent put forward by the Office for Budget Responsibility, as well as the Bank of England's forecasts in last week's quarterly report.

The Bank said it was expecting annual growth of around 2.5 per cent in 2011, picking up to just over 3 per cent in late 2012.

However, the OECD supported the Bank's view that soaring inflation would be only temporary, forecasting that inflation would remain above target next year before falling below 2 per cent in 2012.

The Bank should keep its monetary policy stance on hold until the middle of next year, according to the OECD.

But interest rates would need to start rising "in earnest" from their current historic low of 0.5 per cent, as underlying inflation begins to increase during 2012.

The latest forecast came as figures revealed Britain slumped into the red by another 10.3 billion last month, despite a leap in business tax and VAT revenues.

Public sector net borrowing in October set a record high for the month and marked an increase on the 10.1bn seen a year earlier, according to the Office for National Statistics.

The rise came in spite of signs that the recovery was boosting the government tax take, with corporation tax revenues up 29 per cent and VAT also higher as shoppers rushed to beat January's VAT increase to 20 per cent.

Experts said that, while the amount borrowed in October was slightly more than expected, the significant downward revisions for recent months meant that the year-to-date level was lower than forecast.