Fiscal watchdog to say deficit reduction on track

LONDON (Reuters) - British growth will be stronger and borrowing lower this year than first feared, the government's fiscal watchdog will say on Monday, but Chancellor George Osborne may be wary of calling victory too soon.

The bulk of Britain's austerity drive -- designed to wipe out a budget deficit of more than 10 percent of GDP -- does not kick in until 2011, and the crisis engulfing neighbouring Ireland shows how easily economic growth can be derailed.

The Office for Budget Responsibility, an independent watchdog set up by the coalition government shortly after it came to power in May, will publish updated growth and borrowing forecasts at 12:30 p.m. on Monday.

The figures will provide the fiscal framework for the government's next budget in March and will be followed by updated gilt issuance forecasts from the Debt Management Office and an address by Osborne to parliament.

SO FAR, SO GOOD

The OBR's updated assessment is likely to be positive, at least in the near term. Since its last forecasts in June, GDP growth has been stronger and tax receipts higher than previously pencilled in.

Data from the Office for National Statistics show Britain enjoyed its best six-month performance in a decade between April and September, helping corporate tax revenues rise on the same period last year.

Based on the strength of these figures the OBR is likely to raise its 2010 growth forecast from 1.2 percent to around 1.7 percent, and say borrowing this fiscal year could come in slightly below the 149 billion pounds it was expecting.

However, the OBR's longer term growth projections are already on the optimistic side and are unlikely to be revised up. Its current 2011 GDP growth forecast of 2.3 percent is above the consensus forecast of 1.9 percent, and its forecasts of 2.8 percent for 2012 and 2.9 percent 2013 are similarly upbeat.

"GDP growth for 2010 will inevitably be revised up but beyond that there is little reason for adjustment, particularly given the downside risks from continental Europe," said Philip Shaw, economist at Investec.

"We've had reasonable news on GDP but the government is not in a position yet to say any victories have been won."

IMPACT OF SPENDING REVIEW

Monday's fiscal projections will not take into account Britain's contribution to Ireland's bailout, expected to be in the region of 7 billion pounds.

This contribution, if finalised, will raise Britain's public sector cash requirement but have little impact on the government's favoured borrowing measure since it is likely to be classed as a contingent liability.

The OBR will, however, have its first opportunity to assess the impact of the government's spending review last month which made slightly less draconian cuts to departmental spending than previously anticipated.

On October 20, the government said it would cut investment spending by 2 billion pounds less year than previously planned and would make bigger savings than previously expected from the welfare budget.

The impact of these changes may lead the watchdog to revise down the number public sector job losses likely to go as a result of the spending squeeze from an estimated 490,000.

"The thrust of the OBR's projections will be to acknowledge some of the good news to growth this year but this is no time to get complacent," said Alan Clarke, UK economist at BNP Paribas. "The fiscal tightening has hardly kicked in yet."

(Editing by Toby Chopra)