Friday, 23 July 2010

Credibility Gap?

As part of their programme for greater transparency on public finances, the Con Dem coalition created the Office of Budget Responsibility (OBR) as an 'independent' voice on economic projections.  There have been questions about its independence but of equal or more importance is its credibility.  It predicted that the GDP growth of the UK in 2010 would be 1.3% and this was revised downward to 1.2% after the emergency budget.

However, the estimated GDP growth figures for the second quarter were released today and it was 1.1% in that quarter alone.  If confirmed this would mean that the total GDP growth so far this year is 1.4%.  So in half a year actual growth has been higher than the OBR prediction for the whole year and one quarter almost equalled the prediction. This is not the only case of predictions being overly pessimistic e.g. the scale of this year's deficit has been revised downwards on a number of occasions.  Of particular interest is the finance sector.  It was believed that as much as £30bn of UK tax revenues had been based on unsustainable super profits from this sector but it is appears to be performing well with 1.3% growth (although the proposed EU financial regulations could harm that in future).

Guido argues that this undermines the Labour Party in the longer-term.  An election on the back of a few good years of economic growth is good for any government. However, if the growth is sustained it undermines a central argument of the cuts programme - the need to balance the government books - especially with the Lib Dem poll numbers looking particularly bad.  Also if the growth does not continue Labour will argue that their policies were working until the new government cocked it up. Darling has indeed been trying to claim the credit (see BBC link above) which has some more credibility that Osborne saying it was his measures in the emergency budget announced mere days before the end of the quarter.

1 comment:

Seymour Major said...

The growth figures undermine Alisdair Darling's contention that the spending cuts should not happen until the next year.