Without growth will we even halve the deficit?

The IMF downgrades to UK growth today is awful news for those who are hoping to cut the deficit, explains Left Foot Forward’s Cormac Hollingsworth.

The IMF downgrades to UK growth today is awful news for those who are hoping to cut the deficit.

We’ve already done a simulation of how the downgrades in the OBR GDP growth rate for 2011 feeds into a rising 2011 borrowing. The new IMF prediction for 2011 growth at 1.1% was our line in the sand of whether the coalition would borrow more than the OBR predicted for the Darling budget, 8.3% of GDP. We were worried about that level, and it now looks greatly at risk.

But the IMF has slashed 2012 growth even more. We’ve not got the OBR/Treasury model, but we can do a very rough calculation of the cumulative effect of downgrades in 2011 and 2012 growth on 2012 borrowing:

Versus June 2010 Predictions


2011 GDP growth

2011 borrowing

2012 GDP growth

2012 borrowing
Nov 2010 -0.2 0.1 -0.2 0.1
March 2011 -0.6 0.4 -0.3 0.7

The table shows how the OBR’s downgrades in 2011 and 2012 growth fed into a large rise in 2012 borrowing. From the table, the small downgrades in 2012 growth does not explain the large change in March 2011 prediction for 2012 borrowing. However, the cumulative change in 2011 together with 2012 growth, i.e. the level of GDP in 2012, has clearly had an effect on the 2012 borrowing.

Versus the OBR’s prediction, the IMF predictions are the following:


2011 GDP growth

2012 GDP growth
OBR prediction 1.7% 2.5%
IMF new forecasts 1.1% 1.6%

The IMF now expects 2012 GDP to be 1.5% lower than the OBR predicted.

From a simple sensitivity analysis, the effect of this lower GDP suggests borrowing in 2012-13 will be 8% of GDP. That is versus 5.5% predicted by the OBR following the June emergency budget.

We will get the forecasts from the OBR in November, but what is clear is that while in March the OBR was slashing growth forecasts for just this year, we’re now facing a “lost decade” (the IMF’s words not ours) and growth is being serially downgraded.

We admit our analysis is very rough, but the IMF downgrade of cumulative growth of 1.5% will have a significant impact on borrowing. Without growth we face a real risk borrowing will not be falling fast enough for the deficit to halve. Our final table shows both the Darling budget (halving the deficit by end of parliament) and the March 2011 budget (bringing the deficit to zero by the end of the parliament):


2011 borrowing

2012 borrowing
Left Foot Forward projection 8.3% 8.0%
Mar 2011 OBR Forecast 7.9% 5.5%
Darling budget OBR forecast 8.3% 6.6%

In both cases, the 2012 borrowing is falling. But that’s because there was growth in 2012. Without growth, the deficit will not be cut.

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