Economic recovery this year, says Darling

22 April 2009

Chancellor Alistair Darling has claimed that Britain’s economy will return to growth by the end of the year - but economists immediately poured cold water on his forecasts.

In his 2009 Budget, Darling said he expected the economy to contract by 3.5% this year, more or less in line with independent forecasts. He then predicted the UK would see the return of economic growth by the end of the year, and a rebound in 2010, with 1.25% growth.

He also claimed 2011 will see growth of 3.5% and beyond that an annual trend of 2.75% growth.

But economists said his figures were too optimistic and suggested his forecasts are unlikely to prove accurate, which could have grave implication for the mountain of debt the government is set to run up over the next four years.

Howard Archer, chief UK and European economist at IHS Global Insight, says: “We believe that these forecasts are mildly optimistic in the near term and much more optimistic in the long-term."

Archer predicts the British economy will contract by 3.8% in 2009 and then edge down by a further 0.2% in 2010. Beyond that, he sees growth of 1.7% in 2011.

"This assumes that the economy will contract through this year, albeit at a reduced rate as the year progresses," adds Archer. "We suspect that the economy will only essentially stabilise in the first half of 2010 before recovery develops gradually.”

Others agree. Andrew Smith, KPMG chief economist, explains: “The Budget projections look like a triumph of hope over experience. Despite having to drastically downgrade his forecast for growth this year, the chancellor still expects the economy to rebound over the next two years.

“Even though Darling insists that the end of the recession is in sight, we are still looking at eye-watering budget deficits and a doubling of public debt. And if the chancellor’s growth forecasts again prove over-optimistic, the public finances will turn out even worse."

The chancellor sought to defend his predictions amid criticism of the government's huge levels of borrowing in the coming years. He said that failure to intervene in the 1930s had “turned a serious downturn into a prolonged depression. We will not make that mistake again”.

Darling also told the House of Commons: “The British economy is diverse, flexible and resilient – which is why we can be confident in recovery.”

Rising unemployment and the brutal contraction of the financial sector have meant tax receipts have fallen sharply and are now 1.2% lower as a proportion of GDP than they were a year ago.

As tax receipts have fallen, Britain’s national debt has ballooned and Darling said he would borrow £175 billion – 12.4% of GDP –  this year with a further £173 billion next year.

Borrowing is then forecast to fall to £140 billion, £118 billion and £97 billion in the following years, if the economy grows in line with the chancellor’s forecasts.

This year the tax burden on Britain will be eased by 0.5% but will have to rise by 0.8% a year thereafter to help service the mammoth debt. Net debt, including the cost of stabilising the banking system will increase from 59% this year, to 68% next, 74% in 2011-12, 78% and 79% in 2013-14 as a share of GDP.

The chancellor said it would finally stabilise and then begin to fall in 2015-16. 

"We need to help people now, to maintain key public services, invest for the future, while keeping the public finances on a sustainable footing," he argued. "Indeed, this is the best way to drive up economic growth, which, in turn, is the best way to bring down borrowing and rebalance the public finances.

“There are no quick fixes. No overnight solutions. But because of the progress we have made, here and internationally, we can begin to restore confidence, save jobs, and bring the world economy more quickly out of recession.”

But his critics remain unconvinced.

“The plans for repairing the public finances are long on ambition but short on detail," says Smith. "Cutting public spending has proved difficult in the past and without more detail the plan this time may be regarded as little more than an aspiration.”

And Archer warns: “With extended substantial corrective fiscal action needed, the financial sector unlikely to return to the growth rates seen in recent past years and significant productive capacity currently being lost, we believe that trend growth will be 2.5% at best, and very possibly only 2.25%.

“Clearly, if growth is significantly less than the chancellor forecasts, it will increase the risk that his public finance targets will be missed, thereby requiring additional tighetning measures further out.”

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