Deficit to shrink as UK’s economy bounces back

THE GOVERNMENT has overestimated the amount it will need to borrow this year, given the developing recovery of the economy, according to a bullish report by Ernst & Young’s Item Club.

The Item Club’s research suggests that far from being too optimistic, as it has in the past, the Office for Budget Responsibility (OBR) may now have underestimated the strength of economic growth.

The OBR has said that the public sector’s net borrowing is likely to fall by only £1bn this year, to £120bn in total. However, the Item Club suggests that the recovery is now robust enough that the deficit could fall to £104bn, surpassing the government’s expectations by some distance.

The group of economists suggests that the economy will grow by 1.1 per cent this year, rising to 2.2 per cent in 2014, citing strong data coming from services and manufacturing. The OBR’s forecast in March only predicted 0.6 per cent growth in 2013, followed by 1.8 per cent next year.

While the research points to an economic revival based mostly on consumer spending, it also says that when growth begins to return, business investment and exports will follow on in 2014.

Mark Gregory, chief economist at Ernst & Young, suggests that firms are now ready to start expanding: “businesses have been in survival mode and have been focused on battening down the hatches rather than investing for the future”.

He added that recovery could be unpredictable: “with an improving economy we could be at a tipping point when activity might increase rapidly and without warning”.

The Item Club held its prediction that inflation is likely to rise to three per cent over the summer, but that the effect of rising fuel and food prices was unlikely to be repeated in the second half of the year.