U.K. Prime Minister David Cameron’s planned budget cuts increases the chance the economy will slip back into recession, said Geoffrey Dicks, who heads economic forecasting at Britain’s new fiscal watchdog.
Responding to questions during a parliamentary hearing in London today, Dicks said measures proposed in the June 22 budget led his office to shave 0.5 percentage points from its growth forecast in the “near term.” His Office for Budget Responsibility predicts an expansion of 1.2 percent in 2010.
“There are some budget measures which will have reduced demand,” Dicks told the Treasury Committee, which scrutinizes economic policy. “The near-term outlook for GDP is not as good as it was before the budget. I still don’t think that will mean a double dip, but logically the chances of that happening have increased.”
The U.K. economy grew 0.3 percent in the first quarter. The Bank of England kept its bond-purchase plan in place and left its benchmark interest rate at a record low last week to aid the recovery as the government implements the biggest budget squeeze since World War II and growth in the euro region slows.
Last month’s budget outlined proposals to cut spending and raise taxes by as much as 40 billion pounds ($60 billion) a year. Together with plans set out by Labour Party predecessors, the measures will suck 113 billion pounds out of the economy by 2015. Chancellor of the Exchequer George Osborne is due to spell out budgets for individual departments in the fall.
“It’s always possible under any scenario to have a couple of quarters where output slips back, but it’s not a part of our central forecast, it’s not something we are looking for,” said Dicks, former chief U.K. economist at Royal Bank of Scotland Group Plc.
Challenged over Dicks’s comments, Chief Secretary to the Treasury Danny Alexander told lawmakers that the budget will lead to rising growth and employment and falling unemployment.
European finance ministers meeting in Brussels today welcomed last month’s U.K. budget and the Paris-based Organization for Economic Cooperation and Development said the U.K. must make sure it now implements its consolidation plan.
The OBR’s interim chairman, Alan Budd, said the economy is operating below its long-term potential and that he expects the Bank of England to support growth, provided inflation remains in check.
“The economy is some way below trend,” he told lawmakers. “We don’t completely agree with the Monetary Policy Committee about how low below trend we are.”
The OBR was established by Osborne after the May 6 election to enhance the credibility of the government’s economic and fiscal forecasts. Budd has struggled to convince lawmakers that his office operates without the interference of ministers.
Budd denied that he came under pressure from ministers to publish a lower estimate for public-sector job losses than leaked Treasury documents suggested, saying “there was no conspiracy or pressure on us to change the numbers and no pressure on us to bring forward publication.”
The decision to release the figures a day earlier than planned “was completely ours,” Budd said. “We thought it correct to release the numbers.”
The OBR predicts Britain will lose 490,000 public-sector jobs by April 2015, 160,000 of them as a result of the June budget, according to new data released by the office today.
The projections contrast with OBR estimates published on June 30 that Cameron used to claim that the budget would lead to fewer public-sector job losses over the next three years than Labour had planned. The OBR now predicts public-sector employment would have been higher under Labour.
Departmental spending cuts alone would lead to the loss of 260,000 government jobs by 2015 while payroll-cost restrictions spare 100,000, the OBR said. More than 600,000 jobs will go by 2016, it said.