The economic recovery has been stronger than anticipated, according to the Office of Budget Responsibility.
The OBR revised its growth forecast for 2010 from 1.2 per cent to 1.8 per cent after “greater than expected” growth in the second and third quarters.
The Economic and Fiscal Outlook paper says: “Our central forecast is that the economy will continue to recover from the recession, but at a slower pace than in the 1970s, 1980s and 1990s.”
The report puts the growth down “unsustainably strong” growth in the construction sector and firms rebuilding stocks more quickly than it appeared they would at the time of the last report in June.
In his autumn statement Chancellor George Osborne said: “After the deepest recession since the war, the greatest budget deficit in our peacetime history and the biggest banking crisis of our lifetimes, recovery was always going to be more challenging than after previous recessions, but the message from the Office of Budget Responsibility is that Britain’s economic recovery is on track.”
Shadow Chancellor Alan Johnson said: “It is the OBR’s judgement of the future that matters more than its revised forecast for a year that is almost over. Does the Chancellor accept that the OBR does not expect the fast momentum built up this year to be maintained? Indeed they are explicit, they expect a slow recovery next year as spending cuts begin to take affect and the VAT hike dampens demands.”
The report predicts weaker near-term growth with quarter-on-quarter growth reaching its slowest at 0.3 per cent in the first quarter of next year as the VAT rise kicks in.
The report cut expected GDP growth for 2011 from 2.3 per cent to 2.1 per cent, and for 2012 down from 2.8 per cent to 2.6 per cent.
It adds: “The relatively sluggish medium-term outlook reflects the gradual normalisation of credit conditions, efforts to reduce private sector indebtedness and the impact of the Government’s fiscal consolidation.”
Osborne said: “Britain is decisively dealing with its debts. Borrowing this year is expected to be £1bn less than forecast in June, the OBR forecast public sector net borrowing will fall from £148.5bn this year to just £18bn in 2015-16, government debt as a share of GDP is expected to peak just below 70 per cent in 2012-14 and then fall.”
Johnson said the Government was taking an “reckless gamble” by cutting so deeply, so quickly.
He said fiscal consolidation on the same scale as the Government is currently undertaking has only been attempted by countries benefiting from strong growth in a benign economic environment.
He said: “Japan which has roughly the same level of deficit has learned from its experience over the last ten years and plans to cut by less than a quarter, the Chancellor has chose to take an unprecedented gamble with people’s livelihoods and the country’s future.”
He added: “He has done so on the basis of a fundamental deceit that when he assumed office the public finances were worse than expected. The OBR exposed that deceit and they have confirmed it today.”
The OBR also revised its prediction for the number of public sector workers losing their jobs in the next five years from 490,000 down to 330,000.
The report says this is because the Government decided in the Spending review to reduce its planned cuts in public services spending instead announcing additional cuts in welfare spending.
However, it says Government plans to freeze real total public spending in 2015-16 is expected to hit another 80,000 jobs.