Despite Forecast Difficulties, Britain’s Finance Rating May Drop

The head of the UK government’s watchdog on taxation and spending, at the weekend, told the BBC’s main weekly politics programme why forecasting the economy has been so difficult.

Robert Chote, chairman of the Office for Budget Responsibility (OBR) said on Sunday Politics that export performance has been much worse than anticipated.

“Some of that is easily explicable because of what’s been going on in the global economy and the exchange rate,” he said, “but there are other factors beyond that as well – there may be particular issues with our exports and financial services.”

On Wednesday, March 21st, UK Chancellor, George Osborne, announced his budget statement and blamed the OBR’s lowered UK economic growth forecast (down from the 1.2 percent that it predicted in December to 0.6 percent) on lower than expected exports.

Osborne said that he would cut corporation tax to 20 percent by 2015. It would be a tax cut for growth and jobs, he said, which would make Britain’s the lowest business tax of any major economy in the world.

“Immediate reaction from business lobbies suggests that Chancellor George Osborne has listened to the cacophony of advice from the corporate sector,” wrote Bill Jamison in the Scotsman, on Tuesday. “But with lower growth, higher borrowing and rising debt he had arguably little alternative.

“However,” Jamison wrote, “what business asked for it broadly got.” And he puts the Corporation Tax cut at the top of the list even though some criticise the effectiveness of it not coming into play until April 2015.

Chote told the Politics programme, “What’s been striking about this economic cycle is not so much the depth of the fall from peak to trough during the course of the recession but just how weak the recovery has been subsequent to that.”

He said, “Any Chancellor taking decisions on taxation and public spending has to be in mind that those decisions have a lagged effect and they affect where the economy and public finances are going to be in the future. 

“So, we all know that economic and fiscal forecasting is a difficult act to pull off, and just throwing up your hands and saying ‘it’s difficult, therefore no point in trying to do it, no point trying to set policy expectation where things are going’ would be a council of despair. 

“What we do in our forecasts, in our publications, is to say ‘Don’t bet the farm on our macro-economic forecast being correct’.”

Based on OBR’s economic and fiscal forecasts, Fitch Ratings of London has placed the UK’s ‘AAA’ Long-term Issuer Default Ratings (IDR) on Rating Watch Negative (RWN). This means Fitch see a heightened probability of the UK’s status being downgraded in the near fuure. 

Fitch is carrying out a review of the UK’s sovereign ratings that it expects to finish by the end of April.

With reporting by Peter Collins