Osborne Faces Lower U.K. Growth, More Unemployment in Budget

U.K. Chancellor of the Exchequer George Osborne may face a deteriorating economic outlook when he presents his second budget this week, as government forecasters predict weaker growth, higher unemployment and more borrowing, analysts say.

The Office for Budget Responsibility -- which monitors government borrowing and sets economic forecast -- may say unemployment will rise to about 8.2 percent this year compared with an 7.9 percent forecast made in November. The deficit will increase over the next two years amid weaker growth, analysts say.

“We have to be realistic where we are coming from as a country,” Osborne said on BBC Television’s Andrew Marr Show today. “We have had the biggest banking crisis in our history, the biggest deficit and, now, the additional headwind of rising oil prices.”

Having embarked on the biggest squeeze on public spending since World War II, Osborne said he will now set his sights on measures aimed improving the structure of the economy. Ed Balls, who speaks for the opposition Labour Party on economic affairs, said on the same program that Osborne’s fiscal consolidation was responsible for shaking confidence at a time of economic weakness.

Last week, the Organization for Economic Cooperation and Development cut its forecast for U.K. economic growth in 2011, saying gross domestic product will expand 1.5 percent instead of the 1.7 percent predicted in November.

First Budget

The OBR expected growth of 2.1 percent in November and of 2.6 percent before Osborne presented his first budget in June. The median in a survey on 38 forecasts published by the Treasury on March 16 showed growth of 1.8 percent.

“We suspect the OBR will lower its shorter-term projections,” said Philip Shaw, chief U.K. economist at Investec Bank Plc. “We would not be surprised to see the forecast of 2.1 percent lowered.”

Balls today said Osborne’s plan to eliminate the deficit is failing and the measures to stimulate growth that Osborne is due to announce won’t go far enough.

“We’re not getting the growth to get the deficit down,” Balls said. “Osborne is downgrading his forecasts for jobs and growth next week.”

Implementation of fiscal program, with plans to slash more than 300,000 public-sector jobs over the next four years, begins fully next month yet it comes as weaker growth in the fourth quarter pushed unemployment above 8 percent last week.

That’s increased the likelihood that the OBR will raise its main jobless forecast to 8.2 percent, in line with a “persistent weak demand” forecast that it had published in November. Its main forecast then was 7.9 percent, which was already surpassed last week when jobless rate hit 8 percent in the three months through January.

“It’s not impossible that we get to 8.2 percent given where we are now,” said George Buckley, chief U.K. economist at Deutsche Bank AG. “The OBR’s previous forecast is looking a bit optimistic and a lot will depend now on how companies react to recovery.”

‘Higher Borrowing’

Given the slowdown in economic output, Osborne is also likely to face higher borrowing predictions than those set out by the OBR last year. Better than expected tax receipts may slip back in the last two months of the fiscal year, suggesting no change to this fiscal year’s 148.5 billion pounds borrowing needs.

That weak outlook may increase borrowing beyond the 117 billion pounds in the year through March 2012 and 91 billion in the following fiscal year.

“There is a long way still to go and a downgrading of growth forecasts could result in some upward pressure to the borrowing forecasts,” said Investec’s Shaw.

Such pressure will tie Osborne’s hands when trying to introduce measures to stimulate the economy as it emerges from recession. At the same time, Osborne this morning said the budget won’t seek more spending cuts or higher taxes to reduce the budget deficit and that, instead, he plans “far reaching measures” to increase Britain’s productive capacity.

“Having undertaken the rescue measures last year, I am not going to ask for more,” Osborne told the BBC.

Targeted Support

As part of the plans, Osborne will announce targeted support for those suffering the most, including a 300 million pounds plan to improve the skills of the young unemployed. Osborne will expand a work experience program to 100,000 places from 20,000 at present, according to a person with knowledge of the plans. The plan will also fund 50,000 apprenticeships over four years, the person added.

Chief Secretary to the Treasury Danny Alexander said in an article in the Observer that the budget will “set out further real progress” toward increasing the tax free allowance for all workers on the first 10,000 pounds they earn, a pledge Alexander’s Liberal Democrats made with the Conservative Party when they agreed the coalition’s program for government. One person with knowledge of the plans said the government will increase the threshold to about 8,000 pounds from 7,475 pounds.

Osborne will also say he will study proposals to merge National Insurance and Income Tax in coming years, according to a separate person with knowledge of the plans.

Separately, Osborne will unveil plan to allow private companies to run more hospitals, schools and local council services, the Sunday Telegraph reported, citing “leaked documents.”