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Official growth forecast to be raised

Financial Times reports 2010 forecast to be upgraded - how should Labour respond?

The Financial Times reported yesterday that the Office for Budget Responsibility will announce tomorrow that it will upgrade its 2010 growth forecast for the UK economy.  There will be other changes too.  This should not be surprising.  The UK economy is being managed this year along the lines of Labour's March budget plans.  But the OBR is predicted to be prepared to downgrade its 2011 forecast.

The OBR will apparently raise its 2010 GDP forecast from 1.1% to 1.8%, closer to other forecasts out there (The Observer states it will be 1.7%).  The 2.3% growth forecast for 2011 is reported to be under threat.

The reason for the upgrade for 2010 is that the economy has been growing faster than expected.  No surprise - with relatively small changes, the governments' fiscal plans for 2010/11 are similar to Labour's.  The OBR also apparently believes that consumers are bringing forward spending from 2011 to this year because VAT will rise to 20% (from 17.5%) in January.  The VAT hike was not in Labour's plans.  I wasn't sure how significant this effect would be until this weekend when separately a few (non economist) friends talked about bringing forward big ticket spends they need to make because of the VAT rise on the way.  Anecdotal evidence but, if it is representative, multiply it many times as people over the country make similar decisions (also worrying about harder times ahead).  The predicted surge in consumer spending may reverse in 2011 and that may be behind reports
(from Treasury sources so we must await the official statement) that the 2011 forecast will be lowered.

And with higher growth comes...a lower deficit.  This is no surprise.  The OBR is reportedly going to lower its 2010/11 deficit forecast by £10bn from £149bn.

The Observer reports today that the OBR will lower its forecast increase in public sector unemployment from 500,000 to 400,000.  This is due to the Tory/Lib plans to cut welfare spending further than planned in the Budget in June.  This is an estimate - it's not based on actual decisions made by departments yet as far as I can tell.  It will be interesting to see if a lower growth forecast for 2011 will mean higher predicted private sector unemployment.

Labour has a difficult message to get across but a positive one nevertheless.  The pace of economic recovery in the UK is matching that of the 1980s recovery so far (looking at the recovery in GDP) because of Labour's policies in the March 09 and March 10 budgets.  The 2010 forecasts are average GDP growth figures - GDP so far is growing much faster in reality from the beginning of the year. If we had listened to the Tories we might still be in recession; we may be sharing the same fate as Ireland.  Future growth (and the OBR's 2012 and 2013 forecasts are above consensus at present) could be threatened by harsher than required austerity measures, for which this government has no mandate to implement.

Looking out further, Labour needs to be thinking forward on economic policy.  The UK economy is pretty robust.  So may be the recovery.  We need to be framing the debate now on economic policy to prepare the ground for our answers to the economic questions in three or four years' time.

Stephen Beer, 28/11/2010

On a Q and A panel at All Souls Langham Place
Abstention does not remove responsibility
Eyes on the Federal Reserve.