Outlook for the economy and the public finances

The Treasury reduced its growth forecast for 2008 from 2-2.5% to 1.75-2.25% in light of the global credit crunch. The PricewaterhouseCoopers main scenario, which is broadly in line with the consensus of independent forecasters, is that growth will be at the bottom end of this range at around 1.75% in 2008.

The Treasury expects the economy to begin to recover in 2009, however, with growth picking up to around 2.25-2.75% next year. Our main scenario of 2% growth in 2009 is just below the bottom end of this range.

Public sector net borrowing is now expected by the Treasury to be around £43 billion in 2008/9 and £38 billion in 2009/10, up significantly from Pre-Budget Report (PBR) forecasts of £36 billion and £31 billion respectively. But the Treasury expects that economic growth will bounce back quickly, boosting tax revenues and returning public borrowing in 2012/13 to close to its projected path at the time of the PBR. This is possible, but the economic risks are weighted to the downside at present and there is a danger that borrowing could remain higher than the Treasury projects.

The Treasury forecasts that net public debt (excluding Northern Rock) will peak at 39.8% of GDP in 2010/11, still just within its 40% limit. But there is almost no margin for error here, which explains why the Chancellor had little room for manoeuvre in the Budget.

Given this tight situation, the Chancellor delivered a broadly neutral Budget with a tiny net fiscal loosening of £0.1 billion in 2008/9, but net fiscal tightening of around £0.8 billion in 2009/10 and £1.9 billion in 2010/11.

The relatively tight public spending plans announced last October were largely reaffirmed, with real growth of just over 2% per annum over the next three years. If public borrowing rises higher than the Treasury expects, however, as seems quite possible given the downside risks to economic growth, then either tax rises or tighter spending restraint will probably be needed in the medium-term.