Growth goes down, so what will happen to the deficit?

Alex Hern uses George's Marvellous Deficit Calculator to examine what the news of GDP contraction means for the government's flagship deficit reduction program


For most people, the downside of going back into recession is obvious; but for George Osborne, he’s got an additional worry on his mind. Having bet the farm on deficit reduction, every quarter the deficit fails to fall as much as he promised looks worse and worse for him.

As we have reported before, the size of the deficit is almost perfectly correlated with the level of growth:

Growth and debt forecasts are so well correlated that the statistical signicance is (p<0.001) – that is there is a less than 0.1 per cent chance that the relationship was produced by random variation.

We can even generate an equation to describe the relationship between the OBR’s predictions of growth in 2011 and the deficit in 2011/2, using an ordinary least squares regression. It calculates that the Deficit = 8.9913 – (0.6522 x growth).

The government is now borrowing £168 billion pounds more than Osborne predicted before the election. That difference is almost entirely down to the fact that growth in the last six quarters has been 0.3 per cent, as opposed to the 3.6 per cent that was promised.

Now we have had another quarter of negative growth – again, against Osborne and the OBR’s predictions. If, like us, you are starting to have doubts about the OBR’s ability to ever get a prediction accurate, George’s Marvellous Deficit Calculator is here to help.

In our sidebar, over to the right there, you can put in your prediction for next year’s growth, and find out what the likely deficit would be as a result.

As a worst case scenario, for instance, if the average growth per quarter for next year is -0.2 per cent, leading to an annual contraction of 0.8 per cent, the deficit would be 9.1 per cent. Which is exactly what the deficit was at its peak after the financial crisis.

Try it out yourself, but be warned – you’ll have to pull out some miraculous figures to get deficit reduction back on track.

See also:

• The double-dip begins – Tony Dolphin, January 25th 2012

• When the private sector collapses for a second time – Cormac Hollingsworth, January 19th 2012

• Manufacturers still fear a double-dip recession in 2012 – Tony Burke, December 23rd 2011

• More grim news: Economists predict UK will be back in recession in 2012 – Alex Hern, December 12th 2011

• Stories from the economy, or: The prospects for young people, and other grim talesRichard Exell, November 17th 2011

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