UPDATE 3-UK fiscal watchdog cuts growth, borrowing outlook

* UK watchdog sees growth at 2.6 percent in 2011

* Borrowing profile lower than March budget

* Higher tax receipts, new forecast method helps borrowing

* Report sets stage for fiscal tightening in June 22 budget

(Updates with Osborne statement, context)

By David Milliken and Matt Falloon

LONDON, June 14 (BestGrowthStock) – Britain’s newly created budget
watchdog downgraded economic growth forecasts on Monday but did
not radically alter the scale of austerity measures required from
the country’s coalition government.

Britain’s economy will grow more slowly after this year than
the previous Labour government expected but state borrowing will
fall a bit faster than originally thought partly due to recent
higher tax receipts, the Office for Budget Responsibility said.

Moreover, changes in the assumptions underlying the
forecasts limited the impact of the growth downgrade on the
public finances, and led both Conservative finance minister
George Osborne and his Labour predecessor Alistair Darling to
argue that the forecasts vindicated their policies.

Osborne said the forecasts reinforced the need for major
fiscal tightening in the new Conservative-Liberal Democrat
coalition’s emergency budget on June 22, and blamed Labour for
leaving behind an even bigger fiscal mess than expected.

But Darling said the forecasts showed public borrowing was
on track to fall to acceptable levels without more fiscal
tightening than planned by Labour, and said extra Conservative
spending cuts could push Britain into Japanese-style stagnation.

Britain has a record budget deficit, running close to 11
percent of gross domestic product, and the coalition is under
pressure to reassure markets it will slash borrowing given fears
of contagion from the euro zone fiscal crisis.

The OBR, created shortly after the coalition took office
last month, said the economy should grow 1.3 percent this year,
in line with previous forecasts, but growth would only rise to
2.6 percent in 2011.
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Labour, which had been accused of adopting an overly
optimistic outlook, had expected the economy to grow between 3
and 3.5 percent next year. The OBR also pencilled in slower
growth than Labour for the years ahead.

The weaker growth forecasts had a limited impact on headline
borrowing forecasts because the OBR made different assumptions
about interest rates than the finance ministry did before the
March budget.

The OBR also changed the practice in Labour borrowing
forecasts of assuming that growth would turn out worse than
predicted. Instead it used its central growth forecast for
borrowing estimates, leaving it to government to build in a
safety-margin.

Nonetheless, the OBR stressed the uncertainty surrounding
any economic forecasts. “All … forecasts will be wrong, though
some will be more wrong than others,” said the head of the OBR,
former finance ministry official and central bank policymaker
Alan Budd. “It’s our best shot at an impossible task.”

The OBR, which uses its new central forecast for growth
rather than more pessimistic estimates used in the March 2010
budget, expects public sector net borrowing to fall slightly
faster than predicted in Labour’s last budget.

SLIGHTLY BETTER BORROWING

Sterling rose against the euro and the dollar and British
government bonds trimmed losses after the overall downward
forecast to the UK debt burden.

Markets, rattled by the euro zone fiscal crisis, are on
alert for any sign that borrowing levels are getting out of
control. But analysts were more sanguine.

“There are really no big obvious surprises. The growth
numbers were expected to be revised down and the public finance
numbers have been coming out better than expected,” said Amit
Kara, an economist at UBS.

“We have to understand that the OBR is really just another
forecasting body and its forecasts are just as vulnerable to
being right or wrong as any other respected body.”

Public sector net borrowing is expected to come in at 155
billion pounds ($227 billion) — or 10.5 percent of national
output — in the fiscal year 2010/11, compared with previous
forecasts for 163 billion pounds.

By the end of this parliament in 2014/15, that ratio is seen
falling to 3.9 percent — slightly lower than the 4 percent
predicted in March.

However, Osborne argued borrowing would have been higher if
the OBR had used the same forecasting method as the finance
ministry had used in March, and also if market interest rate
expectations had not fallen in anticipation of extra fiscal
tightening by the new government.

Moreover, he said the coalition would use the structural
budget deficit — which strips out the effect of the business
cycle on government borrowing — to determine fiscal tightening.

Based on this measure, the budget deficit will fall more
slowly than forecast in March.

The OBR said annual cyclically adjusted net borrowing would
fall to 2.8 percent of GDP by 2014/15 from 8.8 percent of GDP in
2009/10, compared to a drop to 2.3 percent from 8.4 percent in
March’s budget.

Though this measure — unlike that for PSNB — paints a
bleaker picture than in March, some economists argued that the
difference was nonetheless minor compared to the overall scale
of British government borrowing.

“The Chancellor (finance minister George Osborne) … is
facing a very similar outlook to the picture in the March
budget,” said George Buckley, an economist at Deutsche Bank.

“The structural deficit is slightly worse, so they might
have to do a bit more than they would have had to in terms of
the structural adjustment.”

Stock Market Trading

(Editing by Ruth Pitchford, Ron Askew)

UPDATE 3-UK fiscal watchdog cuts growth, borrowing outlook