Next Gen News

GDP predicted to grow at 2.6% but public debt falls £8bn on budget forecast and £23bn over five years

11.31am: Brendan Barber, the TUC general secretary, has said that the OBR forecasts show that cutting spending now would be a mistake.

With borrowing not as bad as expected but growth forecast as sluggish, deep cuts now appear increasingly unnecessary and dangerous. Any attempt to press ahead with austerity plans will look like a political project to remodel Britain rather than an economic necessity.

11.30am: Alistair Darling also used his BBC News interview to respond to Ed Balls's suggestion that Darling damaged Labour's chances in the election by refusing to rule out increasing VAT.

Balls made his comments in an article in the Daily Telegraph today. He said that he urged Gordon Brown to rule out putting up VAT but that "others" (ie, Darling) argued against him and that their view prevailed.

Darling said that he was adopting the same strategy that Brown adopted when he was the chancellor and being advised by Balls.

I believe that all chancellors or shadow chancellors have to have as much flexibility [as they can] and actually our policy at the last election was the same policy that we had in the previous three elections, when Ed was quite influential. So I think that the judgment we took was entirely right.

11.21am: Alistair Darling, the shadow chancellor, said that Sir Alan Budd and the OBR were predicting that borrowing would be less than he forecast in his budget before the election. That meant that the coalition government would not have an excuse for putting up VAT, Darling said.

He also accused the government of not having a plan to stimulate economic growth.

If you take away money from the economy, you run the risk that growth is lower still. And if you don't have a strategy for growth - and this government has no strategy for growth - then you will not get borrowing down. Look what's happened to Japan over the last 10 years. We can't afford to repeat that strategy here.

11.10am: Here's some Twitter comment on the OBR forecasts.

From Channel 4 News's Faisal Islam:

so deficit is down; 'structural deficit' osbornes favourite target, is marginally higher

From the BBC's Laura Kuenssberg:

New boss of the OBR says lower growth forecasts are due to 'recent events', but says there is no permanent damage to the economy.

From Newsnight's Paul Mason:

Budd confirms Darling's 2010 Budget WOULD eliminate bulk of structural deficit by 2015

And here's one more from Mason:

Budd refuses to endorse Osborne comment that Budget 2010 "a work of fiction". Says can't comment on it.

10.58am: My colleague Phillip Inman has filed a story about the OBR report. Here's an extract.

City economists said they were comfortable with the growth forecast, which is more in line with their consensus figure over the past six months, but opinion was divided over the prospects for the deficit, with some experts arguing the figure could be much lower.

The OBR's gloomy view of the government's finances and the potential for growth are expected to spur the government to include large tax rises in the budget next week alongside deep cuts in public spending.

10.56am: Jonathan Loynes, chief UK economist at research consultancy Capital Economics, has said the OBR is taking a "surprisingly optimistic" view of the public finances.

On the face of it, [the OBR figures] might seem to relieve the pressure for an additional fiscal tightening, or even make room for tax cuts. But we suspect that the government will still want to err on the side of caution, if only for political reasons. Note too that we don't yet know what the government's fiscal mandate will be - it may require a significantly sharper fall in borrowing than the new forecasts imply. As such, we still expect a pretty tough budget next week.

10.51am: And this is what the OBR has to say about the trend rate of growth:

The forecast for the public finances is based on our central economic forecast, which is presented below. A major uncertainty relates to developments in credit and financial markets, in particular whether the banks are able or willing to supply credit in the amount that is normally required in the recovery phase of the economic cycle; and, if not, whether that credit can be obtained elsewhere. Another major area of uncertainty is whether, and to what extent, private sector spending and employment are able to fill the gap that the cuts in public spending in our forecast leave. The prospects for external demand are also uncertain since the outlook for the euro area is particularly opaque at this time.

We expect the economic recovery to strengthen in 2010 and beyond, as private sector
demand continues to pick up. We estimate that trend output will grow at just over 2.25% over the next three years, slowing to just over 2% from 2014 as demographic changes reduce the growth of the potential labour supply.

From 2011 onwards, GDP is expected to grow at an above-trend rate as the economy rebalances away from consumption towards investment and net exports. Towards the end of the forecast [2015], GDP growth eases back in line with lower trend growth.

10.36am: Here's what the OBR report has to say about borrowing:

Our central forecast is for PSNB [public sector net borrowing] in 2010-11 to be £8bn lower than in the March budget since some of the underlying strength in the tax base in March and April is likely to continue into next year. We have also increased the forecasts for VAT and corporation tax in 2010-11 compared with the March budget. This is due to higher expected inflation this year and to revised judgements on the VAT gap and corporate profits that are discussed further in the receipts section.

By 2014-15 PSNB is forecast to be £3bn lower than in the March budget. The forecast judgment that growth will be lower than assumed in the March budget, as set out in chapter 3, leads to less medium-term strength in the key determinants of the tax base such as labour income and consumption. The March budget public finances forecast used a trend rate of growth 0.25 percentage points lower than the March central case. Compared with the low case used in the March budget, the level of trend output in our central forecast is 2.25% lower in 2014-15. This is the appropriate comparison for the impact of lower trend growth, working through actual growth, on the fiscal aggregates.

10.28am: Here is the passage from the report containing the OBR's central forecasts for the economy:

• GDP growth rises from 2010, reaching 2.75% in 2012. Growth then eases in 2014.

• Consumption growth rises in the forecast and grows by 2% from 2013, below the rate of growth of GDP.

• Business investment started 2010 on a strong note and is forecast to pick up further as the year progresses, though in 2010 as a whole it rises by only 1.25%. The recovery is maintained in 2011, although it takes until 2013 before investment returns to its pre-recession peak. From 2011 onwards business investment rises at an 8-11%.

• Real general government consumption continues to grow in 2010. From 2011 onwards, the fiscal consolidation envisaged by the previous government implies that government consumption falls, with an increasing rate of decline throughout the forecast. General government investment falls sharply in 2011 and continues to decline until 2013, although at a decreasing rate. Government investment returns to growth in 2014.

• Net trade is forecast to subtract from growth in 2010, as relatively robust import growth outweighs still sluggish exports. As the recovery in UK export markets strengthens and sterling's past depreciation boosts UK export volumes, net trade is forecast to contribute positively to growth.

• CPI inflation stays above 3% in the near term, before easing and falling back below target in 2011, after the VAT rate change drops out of the annual comparison. CPI inflation then rises, reaching the 2 per cent target by the end of 2012.

• Employment stabilises this year and then rises from 2011 onwards, reaching just under 30 million in 2014. The ILO unemployment rate peaks in 2010, before falling back to 6.25% in 2014. Claimant count unemployment continues to fall throughout the forecast.

• Whole economy average earnings growth rises gradually in the forecast as productivity recovers. Growth of wages and salaries, which combine employment with average earnings, also picks up, reaching 5.25% in 2014.

10.22am: According to Bloomberg, Budd is also describing his report as "just another forecast". Bloomberg are carrying quotes from Budd's briefing, which is going on now.

10.21am: Sir Alan Budd is describing his forecasts as "a best shot at an impossible task", according to Bloomberg.

10.17am: The Guardian printer has done its work and I've now got the full document on my desk. I'll post some key excerpts in a moment.

10.14am: My colleague Larry Elliott has just sent a snap verdict on the figures.

This is a much gloomier take on the economy than provided by Alistair Darling in his March budget. Two things stand out - the recovery will be less robust, averaging 2.75% in the four years from 2011, and the trend rate of growth - the pace at which the economy can grow without inflation over the long term - has been cut to just 2% after 2014. Conclusion: tough times ahead and some nasties in next week's budget.

10.10am: The PBR document - Pre-budget forecast June 2010 - is now on the OBR's website (pdf).

10.09am: And public borrowing in the 2010/11 financial year will be £155bn - lower than the £163bn predicted at the budget - and £23bn lower than first forecast over the five years to 2014/15, according to the OBR.

10.05am: The OBR is saying the econony will grow by 2.6% in 2011, not by 3.25%, as Alistair Darling predicted in his budget.

9.59am: My colleague Larry Elliott has written a piece for the Guardian warning about the danger posed by spending cuts. In the paper the headline reads: "The deficit hawks need their talons clipped." But, at Comment is Free, the headline is a bit more racy.

The lunatics are back in charge of the economy and they want cuts, cuts, cuts

9.52am: Liam Fox is delivering his first major speech as defence secretary. He promised a "clean break from the military and political mindset of the cold war." And he said the Ministry of Defence would be reorganised into three units: one dealing with strategy and policy; one dealing with the armed forces; and one dealing with policy and procurement. I have not seen the text - it's not on the Ministry of Defence's website yet - but I'll write a proper summary later this morning when I've read it.

9.35am: The Treasury isn't letting political correspondents attend the OBR briefing. (See 8.15am). That could cause a bit of a row. Paul Waugh is complaining already on Twitter.

9.33am: Lord Young of Graffham, the Tory former cabinet minister who has been appointed by David Cameron to review health and safety legislation, has been giving interviews about his role this morning. He told the BBC that safety laws were an "absolute nonsense" in some areas.

There is no question, in any dangerous occupation, in any place where people are in danger, health and safety rules will apply. But there are so many parts of life where it is an absolute nonsense. If there were still music halls, it would be a music hall joke.

He also said that he wanted to report by the end of the summer and that he wanted any changes he recommends to be in place by this time next year.

9.10am: It was "voice from the past" time on the Today programme this morning. Tony Blair was on in his capacity as Middle East peace envoy, talking about Gaza. Sadly he was not asked about the election. (Has he said anything in public about the election, or the coalition? If so, I haven't seen it.) But he had something important to say about Gaza. He said that, from his conversations with the Israeli government, he thought there would soon be a "signficant change" in the way the blockade is enforced. This is from the Press Association.

Blair told the BBC Radio 4 Today programme: "I hope we will be able to do three things over the coming days. First, that, although the blockade will remain in respect of arms and combat material, the items for daily life come in as a matter of course."

Blair said that would mean swapping the current list of permitted items allowed into Gaza with a new list of prohibited items.

He said that should mean "we will be able to complete the UN projects for the renewal of the infrastructure under a special procedure".

Thirdly, he added: "I think it's possible to get a role back for the EU and the Palestinian Authority in the way that these crossings, or some of them, are monitored."
But he saw no prospect of Israel lifting the sea blockade.

Blair said: "The idea would be to make a significant change where the blockade would remain in respect of those items that are a security risk for Israel, but items for daily life will be able to come in."

8.15am: Today we're going to start feeling poorer. That, I think, will be the key outcome from the main event on the diary, the publication of revised growth forecasts by the new Office for Budget Responsibility. In real, money-in-the-economy terms, nothing is going to change at all. The OBR is just publishing forecasts. But, under the new structure created by George Osborne, the Treasury has to use these forecast when writing its budget and if it says growth is going to be lower than expected, that means tax revenues are going to be lower than expected and that means the chancellor is going to have to start making plans to find the money from somewhere else.

The OBR is publishing its forecasts at 10am. The 80-page report should go up then on the OBR's website. Sir Alan Budd, the OBR chairman, is also holding an off-camera briefing for economics correspondents. My colleague Larry Elliott, who has written a story for the paper previewing today's announcement, will be there.

Osborne is presenting his budget on Tuesday next week and today's OBR report is one of several steps being taken to prepare the public for bad news. If you like, it's part of an elaborate "softening up" exercise. Nick Clegg, the deputy prime minister, will make his own contribution when he delivers a speech on the economy later today stressing the need for cuts. The economy is going to dominate, but there's quite a lot of other heavy politics around today as well. Here's a full list of what's in the diary.

9.30am: Liam Fox, the defence secretary, delivers a speech on the defence review.

10am: The OBR publishes its growth forecasts.

11am: Iain Duncan Smith, the work and pensions secretary, and Lord Freud, the welfare minister, launch a scheme to provide teenagers with grandparent mentors.

2.30pm: Nick Clegg delivers his economy speech at the Institute for Government. My colleague Allegra Stratton has got some extracts from it in her story in today's Guardian.

3.30pm: David Cameron makes a statement in the Commons about his visit to Afghanistan.

I'll be blogging about about them all, as well as covering any breaking political news and serving up the best politics from the web.