Growth hit more by inflation than cuts

Julian Harris
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FISCAL watchdog the Office for Budget Responsibility (OBR) said yesterday that high inflation and weak exports were behind the UK economy performing far worse that it had predicted.

The government’s deficit reduction plans may have affected growth, the OBR said, yet its economists calculated that other factors were considerably more likely to have dragged on the recovery.

Soon after it was formed in 2010, the OBR predicted the UK economy would expand 5.7 per cent between the first quarter of 2010 and the second quarter of 2012. Yet figures now estimate that it grew just 0.9 per cent in that period.

However, “cuts in government spending on goods and services have directly reduced GDP by less than half the amount we expected in June 2010”, the report said.

While the OBR “cannot rule out the possibility” that cuts to other strands of state spending – such as on investment – had a stronger negative effect on confidence and growth, it concludes: “unexpectedly stubborn inflation looks a better proximate explanation for weak real consumption in 2011 and deteriorating export markets seem to offer a better explanation for the more recent weakness of net trade.”

“Constrained credit conditions are likely to have hampered investment by smaller firms,” the authors also said, suggesting bigger firms cut down due to the global economic slowdown.

Despite the larger-than-expected fall in GDP over the past two years, the OBR was fairly accurate in predicting reductions in borrowing.

Public sector net borrowing shrank from its post-war peak of 11.2 per cent of GDP in the 2009-10 tax year to 7.8 per cent of GDP in the 2011-12 tax year – close to the original OBR prediction in spite of the surprisingly poor output growth.

But there were still errors in both spending and taxation forecasts. The OBR over-predicted spending by £11.3bn – as departments spent under their budgets – and counted on £14.9bn more in tax revenue than eventually turned up.