Osborne sees lower growth with borrowing slower to fall

LONDON Wed Mar 23, 2011 6:52pm GMT

1 of 17. Chancellor of the Exchequer, George Osborne, addressing the House of Commons as he presents the Budget, March 23, 2011.

Credit: Reuters/Parbul TV via Reuters TV

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LONDON (Reuters) - The government cut this year's economic growth forecast and said borrowing would fall more slowly than hoped in a budget on Wednesday that reaffirmed its commitment to effectively wipe out the deficit by 2015.

Analysts said predictions of much stronger growth in subsequent years looked optimistic and could yet scupper the government's debt-cutting plan.

Seeking to support a faltering economy, Chancellor George Osborne said tax on company profits would be cut by two percentage points to 26 percent from April, rather than by just the one point originally planned.

A levy on banks would be increased to help pay for it, he said, attracting ire from the banking industry.

Osborne also announced a surprise cut in fuel duty, while slapping higher charges on oil and gas production which he said would raise 2 billion pounds).

He cut his growth forecasts to 1.7 percent in 2011 and 2.5 percent in 2012, citing figures from the government's Office for Budget Responsibility (OBR) fiscal watchdog. In November, growth was estimated at 2.1 percent this year and 2.6 in 2012.

The government is attempting to eliminate most of a deficit of 10 percent of national output before the 2015 election, while nurturing the economy back to health following the global financial crisis.

It is cutting public spending by 81 billion pounds over the next four years, while already-announced tax rises will start to kick in from next month.

Analysts said the coalition was gambling on the economy bouncing back strongly before the next election, pointing to a heady growth forecast of 2.9 percent for both 2013 and 2014.

"They're looking for some really quite strong growth in the subsequent years," said Stephen Lewis, chief economist with Monument Securities.

"It's the same old story, really - optimistic growth forecasts helping the budget numbers, but under it all the numbers are a little disturbing compared with where we thought we were," he added.

Sterling fell to the day's low versus the dollar in response to the new economic forecasts while gilts pared gains on estimates that borrowing needs would decline more slowly than previously thought.

Although borrowing would fall less steeply over the next four years, the bulk of the budget deficit would still be eliminated by 2015, Osborne said.

"The OBR confirm that on their central forecast we will meet both these objectives -- a balanced structural current budget and falling national debt by the end of the Parliament."

INFLATION ABOVE TARGET

The Labour party, the unions and some economists argue the government is putting the recovery at risk by cutting the deficit so fast.

"Growth down, last year, this year and next year. It's the same old Tories (Conservatives): it's hurting, but it isn't working," Labour leader Ed Miliband told parliament.

Unions plan to attract 100,000 people to a demonstration on Saturday against government austerity measures.

The OBR forecast that more than 300,000 public sector workers will lose their jobs while Britons are also facing declining living standards as prices rise faster than wages.

Osborne said soaring oil prices meant inflation would remain between 4 and 5 percent this year before dropping to 2.5 percent next year.

Policymakers at the Bank of England face a dilemma, with inflation running at more than double their 2 percent target while the economy is still in a fragile state.

Minutes of this month's Bank of England monetary policy meeting on Wednesday showed no more policymakers had joined the camp wanting to raise interest rates, with three out of nine MPC members backing a hike and the rest wanting to hold rates at a record low of 0.5 percent.

"The new forecast assumes a strong recovery in the early quarters of 2011, and may not have fully taken into account the effect of recent global events on the UK," David Kern, chief economist at the British Chambers of Commerce said.

"If the MPC raises interest rates in the next few months, this could put the growth forecast at risk, and add to the obstacles facing Britain's recovery."

(Additional reporting by Matt Falloon, Keith Weir, Fiona Shaikh, Christina Fincher, Peter Griffiths, editing by Mike Peacock)

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