London: Britain is expected to cut the country’s growth forecasts this week in a key budget update, as finance minister George Osborne increasingly faces calls to rein in the government’s tough austerity measures.
Chancellor of the Exchequer Osborne was to deliver his Autumn Statement before parliament on Wednesday, alongside the latest growth and borrowing forecasts from Britain’s Office for Budget Responsibility (OBR) fiscal watchdog.
Experts predicted that the OBR would cut its forecasts for Britain’s gross domestic product (GDP) with the country’s economy buffeted by state austerity, inflationary pressures and the debt crisis in key trading partner the eurozone.
Weaker economic growth would slash future tax receipts, hitting the coalition government’s purse and sparking upward revisions to its official borrowing targets, analysts say.
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Osborne had in March forecast that the economy would grow by a weaker-than-expected 0.8 per cent this year, followed by 2.0 per cent in 2013 and 2.7 per cent in 2014.
“The growth forecast will have to be revised down, not only because the euro area and hence exports will remain weak, but also because real household incomes continue to decline partly due to the persistence of higher than expected inflation,” Daiwa Capital Markets economist Chris Scicluna told AFP.
“Overall, I think it will be difficult to justify a growth forecast much above 0.5 per cent in 2013.
“Against the backdrop of the flat-lining economy, the chancellor would be ill-advised to try to tighten fiscal policy,” he added.
Recent official data showed Britain had escaped from recession in the third quarter of this year, with its economy growing 1.0 per cent thanks to the London Olympics and rebounding activity after public holidays in the second quarter.
However the outlook is clouded by the eurozone’s long-running debt drama, despite it easing somewhat last week after debt-plagued Greece was granted its latest tranche of bailout cash.
“Disappointing news has become an unfortunate feature of recent Autumn Statements and again this year the chancellor will have to accept downgrades to the OBR’s growth projections,” said KPMG chief economist Andrew Smith.
“These will not be as savage as last year… but nevertheless point to further slippage in the fiscal position.”
Alongside Osborne’s annual budget in March, the OBR predicted that public sector net borrowing (PSNB) as a proportion of economic output would begin to fall in 2015/2016, after peaking at 76.3 per cent of GDP in 2014/15.
And it forecast state borrowing would reach £120 billion ($192 billion, €148 billion) in the 2012/2013 financial year ending in March, compared with #121.4 billion in 2011/2012.
However, with PSNB already standing at £73.3 billion and four months of the financial year to go, Osborne could breach the target.
Britain’s Conservative-Liberal Democrat government, which rose to power in 2010, has imposed a series of painful austerity measures to slash a record deficit that was inherited from the previous Labour administration.
The coalition blamed the recession largely on the debt crisis in the neighbouring eurozone, but the main opposition Labour party claims that the downturn was mainly owing to hefty cuts in state spending.
“At best, the prospects remain uncertain and achieving sustainable above-trend economic growth remains a distant prospect,” said Neil MacKinnon, economist at VTB Capital financial group.
“Achieving the right balance between successful fiscal consolidation and durable economic growth remains a challenge for policymakers.”
The Organisation for Economic Co-operation and Development last week urged Osborne to push back his debt reduction targets rather than drive through more growth-damaging austerity measures.
Away from economic forecasts — and in a populist move — Osborne may on Wednesday decide to announce a crack down on multinationals like Google and Starbucks, who stand accused of paying insufficient corporation tax in Britain.
Osborne “will need to be seen to be active in response to recent public outrage at apparent abuses of the (tax) system,” said analyst Scicluna.
“But these initiatives will hardly provide reliable sources of new revenue.”
He added that Osborne’s recent appointment of Canadian central bank chief Mark Carney to head the Bank of England “will hardly provide a magic remedy” to Britain’s economic ills.
“Indeed, the Autumn Statement will provide a reminder that the government’s economic policy locker is pretty much empty.”