Budget 2011: Leading economists attack Osborne's optimistic growth targets

The government was accused of betting on sparkling growth in the second half of the parliament to keep Britain on course to pay its debts. Critics warned George Osborne, the chancellor, that he risked missing his target to eliminate the annual deficit in five years if optimistic growth figures failed to materialise. Business groups and City economists said there was a strong possibility that growth this year would also prove to be more disappointing than expected by the Treasury. Douglas McWilliams, of the independent thinktank the CEBR, said he expected the economy to remain sluggish this year in the face of public spending cuts. David Kern, chief economist at the British Chambers of Commerce (BCC), said the turbulence in world markets following the tsunami in Japan and unrest throughout the Middle East and north Africa could also dent the UK's growth. They disagreed with predictions by the Office for Budget Responsibility, the government's new independent fiscal watchdog, that growth would be 1.7% in 2011 and move up quickly in subsequent years. Kern said: "While the growth forecast is more realistic than the previous prediction in November, we believe it is still too ambitious. The new forecast assumes a strong recovery in the early quarters of 2011, and may not have fully taken into account the effect of recent global events on the UK." He said rises in interest rates could also restrict growth over the next year. In a 168-page analysis of the economy, the OBR said Britain is on course to reduce its annual budget deficit from 11% to 1.5% of national income over the next five years following a strong recovery that will see growth rise to 2.5% in 2012 and 2.9% in 2013 and 2014 before falling slightly to 2.8% in 2015. Unemployment will peak at 8.3%, or 2.6m, before falling below 2 million in 2015. Higher growth in the last three years of the parliament will offset the effects of the chancellor's imminent public spending cuts and cuts in living standards, it said. The chancellor had planned to cut the annual deficit to 1% by 2015, but higher than expected inflation will push up the cost of index-linked benefits and state pension payments, adding an extra £10bn a year to the cost of borrowing, the OBR said. Economists said the budget was broadly neutral and maintained a spending reduction equivalent to 6% of GDP over the parliament. But the extra £10bn in borrowing had pushed up the deficit by more than predicted in the 2010 budget, and the level of public debt by about 1.8% of GDP higher than predicted a year ago. Capital Economics argued that the extra borrowing was significant when the chancellor was relying on strong growth in later years to bring it back down to the original target. "The key point is that the government's fiscal plans continue to rest on a very healthy acceleration in GDP growth over the next few years, to 2.9% in 2013. That, in turn, would seem to rely heavily on the Bank of England's monetary policy committee to keep monetary policy very supportive," it said. The MPC is deeply divided over how to respond to rising interest rates. Three members of the nine-person committee have voted for interest rate rises in the last couple of months, while Mervyn King, the Bank governor, believes rates should stay low for longer. The MPC policy of keeping the base rate at 0.5% has been called the chancellor's "plan B" because without low rates, economic growth could slow even further, reducing consumer spending and government tax receipts. The chancellor argued the OBR was presenting cautious figures that showed the recovery was firmly in place. He said: "Thanks to the course we have set, the independent forecast was for our economy to grow in each of the next five years, for unemployment to peak this year and then fall and for employment to rise through this parliament. He argued that early cuts gave greater scope for growth in future years. He also pointed out: "The UK is forecast to grow more strongly in the coming year than Spain, Italy, France, the average for the eurozone and the average for the EU." The key changes since the OBR's November forecast have been an unexpected fall in GDP in the final quarter of 2010, a rise in world oil prices and higher than expected inflation, which has risen to more than double its target of 2% at 4.4%. It said higher than expected exports and investment by the private sector would maintain the recovery, but at a slower pace. "Looking over the whole five year forecast horizon, we expect this recovery to be weaker than the recoveries of the 1980s and 1990s, with the calendar growth rate remaining below 3% in every year. This reflects the effects of fiscal consolidation, the relatively slow easing of tight credit conditions and ongoing private sector de-leveraging," it said. Capital Economics said one of the biggest savings made by the chancellor was in the area of public sector investment. The cancellation of school-building programmes and other capital projects meant public sector net investment over the first 11 months of the current financial year was 20% down on 2009 at £32.7bn. "The OBR's latest forecast was that net investment in 2010-11 would be £42.3bn, which is 7% below last year's level," it said. Growth measures outlined in the budget were excluded from the OBR's forecasts because it was too early to tell if they would have a material impact on the overall economy.