UK recovery half OBR's original prediction

Published Tue 26 Jul 2011
Responding to the latest GDP figures of economic growth (0.2%), IPPR says the UK economic recovery is "anaemic" and is calling on the Chancellor to enact "Plan B for deficit reduction".

The thinktank shows that the UK recovery is half as strong as the original prediction made by the Office of Budget Responsibility (OBR).

Nick Pearce, IPPR Director, said:

"Last June, the OBR predicted GDP would grow by 2.6% in 2011 but even if the economy gets back on track in quarters three and four this year, it will barely reach 1.2%.

"As expected, today's growth figures show the UK recovery is anaemic. Outside of London, in particular, the recession continues to be felt and the UK economy might as well still be in recession, even if technically it isn't.

"Borrowing is likely to rise because of weak growth and lower tax receipts. It is time for the Chancellor to seriously consider a Plan B for deficit reduction that puts growth and jobs first."

Download Deficit Reduction Averaging: A Plan B for fiscal tightening, published March 2011.

Writing on the Left Foot Forward blog, IPPR Associate Director, Will Straw argues:

"The OBR's latest prediction for 2011 growth of 1.7 per cent now looks virtually impossible to achieve. Even if the economy gets back on track in Q3 and Q4, 2011 growth will barely hit 1.2 per cent - under half its original prediction of 2.6 per cent which it made in June 2010. The OBR has already been forced to downgrade its growth predictions on three previous occasions and will have to do so for a fourth time when it releases its forecast evaluation report in the autumn. Alongside this, they will be forced to raise their borrowing predictions.

"Today's figures drive a coach and horses through George Osborne's strategy. He has said on many occasions, including in an FT article (?) last March co-authored with Jeffrey Sachs, that fiscal retrenchment would stimulate the economy through increased consumer and business spending as a result of higher confidence and reduced borrowing costs.

"Instead, cuts that are too fast and too deep are exacerbating the unfavourable economic headwinds caused by what the ONS has termed "special events" such as the additional bank holiday, the Royal Wedding, and warm weather in April.

"The sluggish growth was not unexpected. As I wrote on Comment is Free yesterday:

"In the last month alone consumer confidence dipped, lending to businesses fell, manufacturing hit a two-year low, the service sector contracted, retail sales struggled to rebound after a big drop last month and the trade deficit widened.

"George Osborne is being urged by Number 10 to kick-start the economy. The question when will they accept the inevitable and concede that a Plan B is the only way to do this."

Notes to editors:

Download Deficit Reduction Averaging: A Plan B for fiscal tightening, published March 2011.

IPPR believes the deficit should be reduced more slowly than in the Chancellor's plan - so that cyclically-adjusted net borrowing is eliminated by 2017-18. IPPR wants a threshold for investment spending so that it does not fall below 2 per cent of GDP.

IPPR's deficit reduction averaging plan, has five key implications for economic management:

  1. The cyclically-adjusted PSNB will be zero in 2017/18 - on current projections, this will require a 7.6 per cent cut in the cyclically-adjusted PSNB over seven years from its 2010/11 level.
  2. From 2010/11, the cyclically-adjusted PSNB will be reduced by 1.1 per cent of GDP each year on average to achieve the overall 7.6 per cent cut.
  3. In any year, this 1.1 per cent target will be reduced if, in the judgment of the OBR, the fulfilment of such a target would lead to an annual growth rate below 1.5 per cent. Conversely, it will be increased if growth is expected to be above 3 per cent.
  4. In each year, subject to a satisfactory outlook for growth, the annual average target reduction will be reappraised based on the latest actual data, so that the plan stays on course to hit the 2017/18 cyclically-adjusted PSNB target of zero.
  5. If the 2017/18 cyclically-adjusted PSNB target of zero cannot be met without reducing annual GDP growth below 1.5 per cent, then the total length of the deficit reduction programme may be extended.

By allowing a slower pace of deficit reduction in the next few years, the averaging approach would raise the prospects for growth in later years and so reduce the likelihood of the target of a zero PSNB in 2017/18 being missed than would otherwise be the case.

Contact:

Richard Darlington: 07525 481 602, r.darlington@ippr.org

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