The Office for Budget Responsibility (OBR) is set to revise its growth forecasts downwards after warning chancellor Jeremy Hunt that it overestimated the prospects for medium-term growth in the economy.
A report in The Times said the OBR told the chancellor in a private submission to the Treasury with the downgrade wiping out all of the government’s £9.2bn headroom in Hunt’s autumn statement and limiting his scope for manoeuvre as he draws up plans for the budget.
In November the OBR forecast that while the economy would shrink by 1.4% this year it would pick up next year, with GDP averaging about 2.6% over the rest of the forecast period.
But The Times understands that the OBR intends to reduce its forecasts by between 0.2% and 0.5% due to weakness in the economy and shortages in the labour market.
It now believes that, while any recession this year will be “shorter and shallower” than expected, the long-term economic prospects are bleaker.
The forecasts are significant because they could require Hunt to pencil in further savings in his March budget to keep within the fiscal rules he set in November to reduce debt.
The report came a day after worse than expected government borrowing figures for December and as the government wrestles with soaring inflation and a slowing economy.