CBI says budget deficit will rise

http://www.guardian.co.uk/business/2012/may/03/cbi-says-budget-deficit-rise

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Britain's leading employers' organisation warns that government borrowing will rise this year as slower-than-expected growth takes its toll on tax revenues.

In its quarterly economic forecasts on Thursday, the CBI says the sluggish start to 2012 will result in activity expanding by just 0.6% this year and lead to a budget deficit £6bn-£8bn greater than that pencilled in by George Osborne in his March budget.

The CBI says net borrowing in the 2012-13 financial year will be £128.2bn, compared with the £120bn forecast by the independent Office for Budget Responsibility (OBR). In 2011-12, net borrowing stood at £126bn, and the CBI forecast is likely to reignite the row between government and opposition over whether the deficit reduction plan is working.

With the extra bank holiday for the Queen's diamond jubilee likely to cause growth to remain unchanged in the second quarter of 2012, the CBI said it would be the second half before the slight improvement in business sentiment was reflected in more positive economic data.

John Cridland, the CBI's director-general, said that despite the "disappointing" news of a 0.2% drop in output in the first quarter, he remained confident that the economy would grow by 0.6% this year, accelerating to 2% in 2013. "Optimism among businesses has been increasing since the turn of the year, with manufacturing demand holding up. And that is beginning to translate into more jobs and investment." He added that he had always thought it would take the UK a long time to recover from the deep slump of 2008-09, but admitted to being surprised by the weak performance of the last 12 months. "It has been a year or more of disappointed expectations, a series of things have happened where the headwinds have been stronger than expected," the CBI director-general added.

The CBI's forecasts suggest household spending will continue to be squeezed this year as high oil prices keep inflation above the government's 2% target. Unemployment is expected to peak at almost 2.9m early next year and it will be 2014 before economic output returns to its previous peak in early 2008.

James Carrick, Legal & General UK economist, said modelling of the economy by the insurer revealed that forecasts for growth over the next five years by the Treasury's fiscal watchdog were wildly optimistic. He said the OBR forecast for a return to 3% annual growth rates by 2014 was double the likely outcome.

L&G, which manages around £350bn of pension savings and other assets, warned that steep rises in the availability of credit and above-average rates of global growth predicted by the OBR were exaggerated.

"The OBR is relying on very strong global growth helping our exports, alongside a resurgent housing market. We see little chance of either occurring," Carrick said.

A feeble increase in growth to a peak of 1.5% in 2014 will result in lower tax receipts and a bigger budget deficit, forcing the Treasury to impose further spending cuts or revise its timetable for eradicating the structural deficit.