Politicians' poll pledges hit by fickle forecasts on UK economy

Politicians received a sharp reminder this week of the dangers of aligning policy promises with economic forecasts.

The International Monetary Fund's judgment that the UK would struggle to balance its books by the end of the decade - at a time when official domestic forecasts suggest the country will be running a surplus - highlight how sensitive economic predictions are to small changes in assumptions.

Central to the disparity is the fund's expectation that medium-term growth will settle at between 0.2 and 0.4 percentage points lower than UK forecasts. That small adjustment is enough to throw off course plans by George Osborne, the chancellor, to eliminate the deficit by 2019.

Carl Emmerson, deputy director of the Institute for Fiscal Studies, said policy makers needed to remember there was a lot of uncertainty in all forecasts and should not "promise things you can't guarantee".

Figures from the IMF and the Office for Budget Responsibility were "in the same ball park", he added.

"We should have a plan, but recognise we should build some caution in because things might not turn out the way we hope."

While slower growth is a problem for all parties, politically it is more difficult for the Conservatives, who have promised to balance the books by a set date. The Labour party has a target of a surplus on the current budget "as soon as possible".

The OBR is currently in "purdah" - a period of pre-election silence imposed on all government bodies - but it is likely to be relaxed about the forecast discrepancy.

First, this is because the difference five years out amounts to about 0.6 per cent of gross domestic product - well within acceptable margins of error - and, second, because it has been open in the past about the fact that it operates within constraints that do not apply to other forecasters.

There are no departmental spending plans after 2015-16, and the overall spending assumption for following years is set by the Treasury. The OBR is required to accept these numbers at face value, whereas other forecasters have more latitude to decide whether they believe that cuts are achievable.

Solving the puzzle of the UK's poor productivity is a key to forecasting how fast Britain will grow - and how painful it will be to fix the finances.

The OBR and the IMF agree that productivity will expand, but economists' views are at both ends of the spectrum.

Vicky Redwood, of Capital Economics, said she believed that economists and politicians were "significantly overestimating" the permanent damage inflicted on the UK economy by the financial crisis and recession.

She expected the economy to grow strongly over the next few years without generating inflation, and that the structural - or permanent - element of the deficit was not as large as thought.

"As this becomes apparent, austerity can be significantly scaled back," she said, adding that under the coalition's current plans there could be a budget surplus of tens of billions of pounds by the end of the decade.

Phil Lachowycz, an economist at Fathom Consulting, was far more cautious. He stressed that in every year since 2008 productivity had failed to improve, and he thought the rate of trend growth has slowed, meaning that more of the deficit was structural and would not be eroded as the economy expanded.

"If you have got lower growth rates, your tax base is growing by less and so you are naturally more pessimistic about the state of the finances," he said.

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