Austerity may have hurt UK growth more than predicted

LONDON Tue Oct 16, 2012 6:45am EDT

A construction worker walks past a colourful hoarding in the city of London October 4, 2012. REUTERS/Luke MacGregor

A construction worker walks past a colourful hoarding in the city of London October 4, 2012.

Credit: Reuters/Luke MacGregor

LONDON (Reuters) - The British government's spending cuts and tax increases may have hurt economic growth more than originally assumed, the country's forecasting body OBR said on Tuesday.

The independent Office for Budget Responsibility's assessment is likely to fuel the heated debate about the government's austerity drive, which the opposition in parliament blames for the renewed recession in Britain.

The OBR -- set up by the government to produce forecasts and assess fiscal policy -- also said in its annual evaluation of its forecasting record that the financial crisis may have caused a lasting hit to the economy's ability to grow.

"Along with many other forecasters, we significantly overestimated economic growth over the past two years," it said.

The hit from stubborn inflation on consumer spending, worsening export markets, and impaired credit conditions as well as the euro area anxiety and the impact of uncertainty on business investment all contributed to the weak growth, it said.

"Fiscal consolidation may also have done more to slow growth than we assumed," the OBR economists said.

However, the OBR noted that the so called fiscal multiplier - which defines the impact of fiscal policy on growth - would have had to be twice as large as originally assumed to explain the full shortfall in growth.

The OBR had predicted in June 2010 - just after the current coalition government of Conservatives and Liberal Democrats came to power - that the economy would grow 5.7 percent between the first quarter of 2010 and the second quarter of 2012.

However, it has grown only 0.9 percent.

Nevertheless, public borrowing declined from 11.2 percent of gross domestic product in the fiscal year 2009-2010 to 7.8 percent in 2011-2012, largely as the OBR had forecast.

"Nominal consumer spending and the labor market performed more strongly than the real economy, helping to sustain receipts from labor taxes and VAT while restraining social security bills," the OBR said.

The government also spent less than budgeted for and less than expected on public services and administration, it added.

The International Monetary Fund cut its economic forecasts for Britain on Monday, and said more Bank of England stimulus -- and possibly higher public spending or tax cuts -- may be needed if the outlook darkens.

In March, the OBR forecast growth of 0.8 percent for the British economy. However, the IMF like most economists now think that the economy will shrink in 2012 after a three quarters of recession since late 2011.

The OBR said that an unexpected slump in trade and investment were the main reasons for the renewed recession. "Changes in government spending directly added to GDP rather than subtracting from it as we predicted," it said.

The lack of growth has piled pressure on the government to ease austerity, aimed at erasing a huge budget deficit.

Finance minister George Osborne has reiterated his commitment to stick to its plan of tax hikes and spending cuts, but many economists expect him to miss one of his goals -- a fall in debt to GDP ratio by 2015 -- anyway.

The OBR will publish new forecasts on December 5 for Osborne's autumn statement, when he may face the tough choice of either announcing more spending cuts or delay his debt target.

(Reporting by Sven Egenter. Editing by Jeremy Gaunt.)

Comments (0)
This discussion is now closed. We welcome comments on our articles for a limited period after their publication.