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UK growth forecast downgraded to 2.6%

UK growth has been downgraded by the Office of Budget Responsibility on the eve of the emergency Budget.

The OBR, which was created to provide independent forecasts of the public finances and the economy, says UK GDP will rise to 2.6 per cent in 2011, below the last Government’s 3.25 per cent prediction by 2011. It says it will rise to 2.8 per cent in 2012 but fall to 2.6 per cent by 2014.

The body also says inflation will stay above 3 per cent in the near term, before easing and falling back below target in 2011, eventually reaching the 2 per cent target by the end of 2012.

The OBR says public spending will “fall sharply” next year as the Government looks to reduce the deficit. It says net borrowing will fall from 11.1 per cent of GDP this year to 3.9 per cent GDP by 2014. It also says public sector debt will continue to rise, from 62 per cent of GDP this year to 74.4 per cent GDP by 2014.

It says business growth will continue to increase through 2011 but will not reach pre-recession peaks until into 2013. It also predicts that house prices may be adversely affected through this year and next year by credit constraints, with mortgage approvals remaining muted.

Chancellor George Osborne says he will use the predictions made by the OBR in helping put together his first Budget on June 22. The OBR was created by the Conservatives as a means of offering independent non-political growth forecasts.

Citigroup analyst Michael Saunders says the existence of the OBR’s independent forecasts will help improve Budgets going forward.

He says: “We expect an immediate £10bn tax hike plus spending cuts that gradually build to about £15bn versus the Budget figures. With underlying fiscal trends beginning to improve, plus early fiscal tightening, the UK fiscal deficit is likely to fall much faster than the consensus currently expects in coming years.”

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