The ‘Budget for growth’ sets the scene for low output and high unemployment
The OBR have concluded that “looking over the whole five-year forecast horizon, we expect this recovery to be weaker than the recoveries of the 1980s or the 1990s”. Their revised forecast reveals that they expect ILO unemployment to remain at 2.6 million until the second quarter of 2012 (it is currently just over 2.5 million) and that by 2016 they believe 2 million people will still be out of work. Inflation is forecast to remain above target until 2013, with RPI set to stick at above 5 per cent until the end of this year. And earnings growth has been revised down – wages are now forecast to remain below inflation throughout 2012. In addition, the OBR’s revised growth forecast for this year (1.7 per cent, down from 2.1) also comes with a health warning – recognising the ‘considerable uncertainty’ around their central forecast they have modelled two alternative scenarios, one where inflation is higher and a second where demand weakens in the euro area: both lead to weaker growth and higher unemployment. This was not a budget for growth – but it has provided an advance warning of the impacts that the Chancellor’s spending cuts are set to have for the UK’s economy.