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UK growth forecast lowered

The new, independent Office for Budget Responsibility (OBR) believes that UK growth will be lower than previously forecast by the last Labour government. It projects that UK GDP growth will be 1.3% this year, and 2.6% next year. This compares with the previous government’s forecast for 2010 of 3.25%.  The OBR also forecasts growth of 2.8% in both 2012 and 2013 and 2.6% in 2014.

What will be the impact of lower growth? Lower growth will mean less taxation and lower government revenues. This will mean that given the current government’s imperative to reduce the budget deficit, that either spending will have to be cut even further or borrowing allowed to rise somewhat. Of course, the danger as I have mentioned previously is that further reductions in government spending are going to derail the recovery and cause a plunge back into recession.

The government has been arguing that the markets will plunge if the deficit is not cut, and yet the markets will also go into freefall if the recovery is curtailed. We seem to be in a Catch 22 situation at the moment.

Professor David Blanchflower, former member of the Monetary Policy Committee has just been quoted by the BBC as saying that cutting public spending could risk sending the UK economy into a “death spiral”.

On the other hand, the OBR has said that the public deficit is not as bad as previously forecast. Its prediction for 2010-11 is that the deficit will fall to 10.5% of GDP as opposed to the 11.1% which the previous government estimated.

Nick Clegg, the deputy Prime Minister, is expected to say today that cutting spending is the most “progressive” option open to the government, as this will help it to protect those most in need. The thinking here is that firstly, if cuts are not made then more government revenues will be spent on debt servicing than on important areas such as the NHS and schools. This poses the question as to whether money should be paid to the banking sector rather than to hospitals and education. Secondly, the argument is that if the government doesn’t make appropriate cuts the market will make the decisions for it with no protection for the neediest sections of society.

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Posted in economic growth, government borrowing, government spending, Gross National Income, recession

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