Cut in growth forecasts sinks Chancellor's borrowing plans

Chancellor George Osborne today admitted he was having to scale back his ambitious plans to cut borrowing by £47 billion after slower than expected growth.

The independent Office for Budget Responsibility watchdog slashed growth forecasts for 2011 from 2.1% to 1.7%. The outlook for 2012 is also less rosy with 2.5% pencilled in against 2.6% before growth recovers to 2.9% in 2013, in line with last November's forecast.

The OBR's more downbeat predictions - the fourth downgrade to the UK's growth prospects since the independent body was established before last June's emergency Budget - raises more doubts over the nation's fragile recovery.

The watchdog put the downgrade down to a toxic mix of surging commodity prices and higher inflation, as well as the economy's shock 0.6% slide at the end of 2010, which comes on the brink of the toughest year in the Chancellor's deficit-busting programme.

Sterling fell more than a cent against the dollar to $1.6242 following the growth forecasts as markets bet against the Bank of England swiftly raising interest rates from their current 0.5% record low in a slower economic recovery.

The UK's borrowing forecast is £146 billion, below the £148.5 billion pencilled in by the OBR in November, but a much smaller shortfall than orignally hoped for in the City.

The nation's borrowing bill will be £5 billion higher than previously thought next year at £122 billion, before falling more slowly than expected to £101 billion in 2012-13 and £70 billion the year after.

Borrowing will also be £22 billion higher than first thought in the final two years of the forecast.

Despite the disappointment on borrowing and growth, the OBR said the Chancellor is on course to meet its target of a balanced, current budget and falling national debt by the end of the Parliament - meaning that the Treasury has no need to make deeper cuts or hike taxes.

Osborne said: "The size of the task of repairing Britain's finances remains unchanged."

But British Chambers of Commerce chief economist David Kern warned that even the OBR's lowered growth forecasts were still "too ambitious".

He said: "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. If the MPC raises interest rates in the next few months, this could put the growth forecast at risk."

IHS Global Insight's Howard Archer added: "If the OBR's longer-term growth forecasts prove modestly optimistic as we suspect, this suggests that the Chancellor will either eventually have to take additional fiscal corrective measures to achieve his long-term budgetary targets or otherwise accept some slippage."