Inflation, weak exports and tight credit were the main reasons Britain's growth forecasts were wrong over the past two years, the government body responsible said on Tuesday, while austerity may also have hurt more than first assumed.
The independent Office for Budget Responsibility - set up by the government to produce forecasts and assess fiscal policy - also said in its annual evaluation of its forecasting record that the financial crisis may have dealt a lasting blow to the economy's ability to grow.
Its overall assessment is unlikely to end the debate about what caused the weak economy, with the government pointing to the euro zone debt crisis and the opposition blaming the austerity drive "Along with many other forecasters, we significantly overestimated economic growth over the past two years," it said. OBR chairman Robert Chote stressed in a news conference that the main reason was not an underestimation of the impact of the government's austerity.
"The error in over-optimism is pretty much evenly spread between consumption, private investment and net trade," Chote said. While direct government spending had been more positive for growth than the OBR anticipated in its forecasts made in 2010, Chote said the austerity package might have had more of a negative impact by affecting investment behaviour.
"Businesses might be concerned about future demand for their products because of the way they are thinking people will be responding to the fiscal consolidation," Chote explained. In the report, the OBR said that "fiscal consolidation may also have done more to slow growth than we assumed".
The International Monetary Fund (IMF) suggested in its recent report that the so called fiscal multiplier - which defines the overall impact of fiscal policy on growth - may have been much larger than it initially thought. The OBR's assessment of the main reasons why the economy grew much less than forecast two years ago largely chimes in with that given by the Bank of England.
The OBR had predicted in 2010 - just after the current coalition government of Conservatives and Liberal Democrats came to power - that the economy would grow 5.7 percent between the first quarter of 2010 and the second quarter of 2012. However, it grew only 0.9 percent. Nevertheless, public borrowing declined from 11.2 percent of gross domestic product in the fiscal year 2009-2010 to 7.8 percent in 2011-2012, largely as the OBR had forecast.
Robust nominal consumer spending and a stronger labour market helped to sustain receipts from labour and sales taxes, while restraining social security bills, the OBR said. The government also spent less than budgeted for and less than expected on public services and administration, it added.
In March, the OBR forecast growth of 0.8 percent this year for the British economy. However, the IMF like most economists now think that the economy will shrink in 2012 after it fell back into recession in late 2011. The OBR said that the unexpected weakness of trade and investment were the main reasons for the renewed recession. The lack of growth has piled pressure on the government to ease austerity, aimed at erasing a huge budget deficit.
Finance minister George Osborne has reiterated his commitment to his programme of tax hikes and spending cuts, but many economists expect him to miss one of his goals - a fall in debt to GDP ratio by 2015-16 - anyway. The OBR will publish new forecasts on December 5 for Osborne's autumn statement, when he may face the tough choice of either announcing more spending cuts or delaying his debt target.