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OBR report erring on the side of optimism, says business

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The reaction of the business community to the Office of Budget Responsibility’s latest set of economic forecasts was tinged with suspicions that they take too rosy an outlook.

David Kern, chief economist at the British Chambers of Commerce (BCC), said: “While the new OBR forecast is more realistic than previous official forecasts by the Treasury, we believe it is still too optimistic.”

Mr Kern described the adjustment of the 2010 forecast for growth from 1.2 per cent to 1.8 per cent as more reflective of the UK economic climate but insisted it was still a largely historical figure.

He continued: “The growth forecasts for 2011 onwards appear too ambitious, although we agree with the broad underlying assumption that Britain’s medium-term prospects will gradually improve over time.

“We share the OBR’s assessment that the flexibility of the labour market will prevent a major worsening of the situation; however we believe the forecast for unemployment is overly positive.

“Overall, the OBR forecast reinforces our confidence that Britain’s private sector will be able to drive recovery in the face of tough deficit-cutting programme. We can’t be complacent as there are still risks ahead, particularly in the early part of 2011.”

It was a view shared by the Institute of Directors (IoD).

The IoD’s chief economist, Graeme Leach questioned the robustness of UK growth as predicted by the OBR, even given its decision to downgrade its previous estimates for 2011.

Mr Leach said: “We face very strong headwinds next year. Real take home pay faces a sharp squeeze and the savings ratio is already very low. Throw in ongoing problems in the financial system and anaemic money supply growth and our judgement is that the economy will be weaker than expected.”

But Mr Leach went on to identify the really interesting story in the OBR report as the slashing in public sector job losses from 490,000 to 330,000.

He commented: “This means that the projected public sector employment losses are almost half those seen in the 1990s. The peak-to-trough reduction in public spending in the 1990s was 7.4 per cent of GDP. The comparable reduction now is 7.9 per cent of GDP by 2015-16.

“So the spending squeeze is on a par with the 1990s but the employment shake-out is far less. This is puzzling even when we allow for a greater burden of the cuts falling on welfare spending this time around.”

Caution formed the keynote of the response of the British Retail Consortium (BRC) too.

While acknowledging that the improved growth forecast for 2010 represents good news, the BRC’s director general, Stephen Robertson warned that weak retail sales are still a measure of how uncertain recovery remains.

Mr Robertson said: “In real terms, retail sales have been down year-on-year every month since June. Consumer confidence continues to fall. People’s worries about job prospects and personal finances are mounting. The very necessary public sector cuts together with January’s VAT rise have still to hit.”

The BRC said it wanted to see the Chancellor use the better-than-expected position as an opportunity to ease tax burdens on businesses and householders and to get back to the 80:20 balance between cuts/taxation he promised.

Mr Robertson concluded: “Using any extra money he finds himself with to hold back next April’s business rates increases and to remove the £1 billion carbon reduction stealth tax he’s slapped on businesses would support retails’ dual role in growing jobs and the economy while holding down household bills.”