Tuesday, October 16 11:57:57
The British government's spending cuts and tax increases may have hurt economic growth more than originally assumed, the country's forecasting body OBR said today.
The independent Office for Budget Responsibility's assessment is likely to fuel the heated debate about the government's austerity drive, which the opposition in parliament blames for the renewed recession in Britain.
The OBR -- set up by the government to produce forecasts and assess fiscal policy -- also said in its annual evaluation of its forecasting record that the financial crisis may have caused a lasting hit to the economy's ability to grow.
"Along with many other forecasters, we significantly overestimated economic growth over the past two years," it said.
The hit from stubborn inflation on consumer spending, worsening export markets, and impaired credit conditions as well as the euro area anxiety and the impact of uncertainty on business investment all contributed to the weak growth, it said.
"Fiscal consolidation may also have done more to slow growth than we assumed," the OBR economists said.
However, the OBR noted that the so called fiscal multiplier - which defines the impact of fiscal policy on growth - would have had to be twice as large as originally assumed to explain the full shortfall in growth.
The OBR had predicted in June 2010 - just after the current coalition government of Conservatives and Liberal Democrats came to power - that the economy would grow 5.7 percent between the first quarter of 2010 and the second quarter of 2012.
However, it has grown only 0.9 percent.
Nevertheless, public borrowing declined from 11.2 percent of gross domestic product in the fiscal year 2009-2010 to 7.8 percent in 2011-2012, largely as the OBR had forecast.
"Nominal consumer spending and the labour market performed more strongly than the real economy, helping to sustain receipts from labour taxes and VAT while restraining social security bills," the OBR said. (C ) Reuters