Goldmans' O'Neill says OBR is too bearish

Goldman Sachs chief economist Jim O’Neill believes the Office for Budget Responsibility is being too cautious with its prediction of 2.6% growth in the UK next year, claiming the economy could in fact expand by more than 3%.

In a comment piece for the London Evening Standard, O’Neill says the OBR forecasts cleared the path for the Chancellor to announce a tougher Budget than most signals appeared to be hinting at.

He says: “This is also in line with the traditional practice for politicians: get the tough stuff done early so that the electorate can not punish the Government.”

However he warns the Chancellor George Osborne to proceed with caution.

He says: “The OBR revised down the “official” growth forecast for the next year from 3.25 to 2.6 per cent, which adds to the impression that all is still not well, and of course the nation and its public sector employees in particular await the next few months with trepidation.

"The OBR may be right; but they could easily be wrong. At Goldman Sachs we are more optimistic — pending Budget measures. This is about both this year's growth outlook, next year and the trend growth rate.”

The OBR has predicted trend growth of around 2%, rather than the previous assumption of 2.75%.

O’Neill adds: “We think 2.75% is about right for the trend, and that growth next year could indeed be more than 3%. With both these, our view is that the structural deficit is probably a lot lower than the 8% the OBR is now telling the Government. Importantly, the BOE forecasts, despite what the Governor's tone often suggests, are similarly optimistic.”

The Goldman Sachs economist says while the UK deficit is too high, and the growth of debt concerning, the UK situation is nothing like that in Greece and Mediterranean countries.

“In particular, we have an economic recovery under way, while they do not. “

He believes a number of important economic indicators remain positive. He says among these are the much maligned manufacturing sector, which appears to be recovering well.

In addition, he says most evidence on unemployment appears to be improving and he believes that, despite the public sector challenges, unemployment may have peaked.

He says: “For the Government, this gives the background in which further fiscal tightening can and should be achieved. Indeed, ministers should be aiming for a zero current deficit over the medium term, adjusting through the inevitable cycles of up and down. “

“But they need to be careful not to go too far too soon. Too-high tax increases or overly savage spending cuts will have an impact, and unlike past similar periods there is little scope for a domestic monetary offset, at least in terms of conventional policy. With interest rates at zero, all that could be tried is additional quantitative easing and for the Bank to buy even more financial assets. This is an unpredictable and unknown path.”