It’s now been 16 months since George Osborne first set out his strategy to eliminate the structural deficit by the end of this Parliament at his first budget in June 2010.
Over those 16 months a lot has changed – the domestic economy has been much weaker than anticipated by the OBR whilst the international outlook has recently become much, much darker.
Since first revealing the OBR’s forecasts for growth George Osborne has been forced to announce downgrades to them twice – once in November last year and then again in March this year. In all likelihood he will be forced into announcing more wide ranging downgrades next month at his Autumn Statement.
The effect of this gradual downgrading of expectations – from the June 2010 forecast to the November 2010 forecast to the March 2011 and soon to the November 2011 forecast – is that it is easy to miss just how large these downgrades actually are.
Given that Osborne has in no way fundamentally revised his plans, indeed he refused to even acknowledge that change might be needed, the fair comparison when the November forecast is released will not be the March forecast but to June 2010. Osborne’s plans were premised on strong growth driven by exports, investment and resilient consumer spending, none of which appears to be on track.
The chart below compares the OBR forecasts for growth from 2011 to 2015 as they were in June 2010, to the most recent average estimates of independent forecasters (2011 and 2012 are from the September forecast whilst 2013-2015 are from the August forecast as longer term forecasts are only published 4 times a year).
As can be clearly seen the latest forecast from independent forecasters is now well below that of the OBR – all the way out to 2015.
The graph below demonstrates the cumulative shortfall in the level of GDP – what can be thought of as the ‘growth gap’.
By 2015 the average independent forecast is now for the level of GDP to be 3.5% below that of the OBR or, in money terms, about £50bn.
Despite these huge downgrades George Osborne is sticking with his plan. A plan that was based on a far more optimistic growth picture.