Budget responsibility and all that

The Office for Budget Responsibility published its first report today on the economy and implications for government. It is independent of the government so is allegedly likely to be more accurate than the government’s forecasts from HM Treasury, which we have been saying have been overoptimistic for over two years now.

As for the key points, GDP growth for next year has been revised down from 3.25% (in Budget 2010) to 2.6% with 2.75% growth in the two years afterwards. This is concerning given that it is following the sharpest fall in GDP on record and still only around long-term trend growth.

Of more interest to the construction industry should be government investment, which they expect to fall 19% in 2011, 9% in 2012 and a further 7% in 2013. That does not bode well for construction but the falls in spending are only what were expected given the state of the public finances.

Public sector currently accounts for 40% of total construction spending (given the falls in private sector spending) and the extent of the spending cuts are such that it will have a considerable impact on capital spending, the area that effects construction.

More detail on the spending cuts will only be given on 22 June in the emergency budget and then the government’s spending review in the autumn as the government attempts to drip-feed information on spending cuts to placate the speculators and ensure that they don’t do to us what they have done to Greece.

Given the fall in government spending, it is curious to see that the OBR anticipates a fall in unemployment in 2011. Personally, I find this strange given that gvernment is expecting to reduce public sector employment significantly.

Public sector currently employs 6.1 million people and a 5% fall alone would lead to an extra 300,000 people added to the unemployment figures.

The other area of interest is inflation. The OBR anticipates inflation slowing to 1.6% in 2011 and then 2.0% in later years despite an increase in global economic activity, raising domestic demand and imported inflation plus the potential for further rises in commodities and oil prices.

The OBR’s inflation forecasts all rest on the assumption that the MPC does its job perfectly over the next few years.

Overall, I wouldn’t disagree with the OBR forecasts on economic activity and government spending. Unfortunately, it is not good news (albeit unexpected for anyone who has been reading our forecasts over the last two years).

As for the unemployment, I suspect they are underestimating the effects of the public sector cuts that they have outlined. In terms of inflation, the government has consistently underestimated the effects of price rises in the last couple of years and I suspect this is no different.