Economists cut their forecasts

Julian Harris
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ECONOMISTS have slashed expectations for this year’s UK growth by half a per cent in recent months, as worries mount over sovereign debt crises on both sides of the pond.

Forecasters now see the British economy expanding by just 1.3 per cent in 2011 – down from 1.8 per cent as recently as March, a poll of independent economists revealed last night.

Last month they still expected growth of 1.5 per cent, according to the poll compiled by the Treasury.

Growth for 2012 was revised lower, from 2.1 per cent to two per cent.

The downbeat news compounds an already miserable week for chancellor George Osborne, who was named by Rebekah Brooks on Tuesday as the force behind hiring former News of the World editor Andy Coulson as Number 10’s spin doctor.

With the UK economy failing to grow at any kind of meaningful pace, Osborne's plans to slash the country’s mammoth deficit are increasingly in danger. Economists now see public borrowing of £125.1bn in 2011-12, up from forecasts of £121.5bn in March.

Osborne’s progress in tidying up the UK’s dire public finances will be clearer this morning, after official data is released for June.

Borrowing was £1.5bn higher in April and May than at the same point last year, knocking the coalition’s plan to reduce the deficit by around £20bn. Spending in the first two months of this financial year was 4.1 per cent higher than the same time in 2010.

Despite the over-spend, Labour last night blamed the UK’s anaemic growth on Osborne’s planned cuts. The deficit reduction “goes too far and too fast”, a party spokesperson said, arguing for a reversal of the VAT hike.

The Federation of Small Businesses this week called on the government to temporarily slash VAT for the construction and tourism sectors, in a bid to kick start the economy.

Yet Osborne’s policy of raising VAT while scheduling reductions in business tax was supported by Berenberg Bank economist Holger Schmieding.

“Cutting business taxes is the strongest signal to send to global firms, while other supply side reforms will help boost the economy in the medium-term,” Dr Schmieding said.

“Britain is going through a diet like Germany did seven or eight years ago. You cannot abandon the diet just because you don’t like it at first. It may not be nice but eventually it makes you healthier.” GDP figures for the second quarter of the year will be published on Tuesday of next week. “We always maintained the recovery would be choppy,” the Treasury told City A.M.