LONDON (Reuters) -Britain’s official budget watchdog said on Tuesday that it had been too optimistic about the country’s economic growth outlook, raising the prospect of a downgrade of its forecasts which would be a blow to finance minister Rachel Reeves.
The Office for Budget Responsibility said in an annual assessment of its forecasting that its projections had overestimated annual economic growth by an average of 0.7 percentage points when looking five years ahead.
The OBR said its over-optimism about the five-year outlook since the office was created in 2010 was mirrored in projections by a range of other forecasters.
But the report is likely to add to expectations that the official forecasts that underpin the government’s tax and spending plans will be cut later this year, further complicating the task facing Reeves to stick to her budget rules.
Allan Monks, an economist with JP Morgan, said the last time the OBR made a large downgrade to its growth forecasts in 2017 it said that the change had been foreshadowed in its forecast evaluation report.
“The key question now is magnitude,” Monks said.
If the OBR shaves 0.1-0.2 percentage points from its forecast for average annual potential economic growth, it could cost the public finances between 9 and 18 billion pounds a year, he said.
The OBR said in March that Reeves had only a small buffer of just under 10 billion pounds ($13.7 billion) for meeting her fiscal rules as she aims to balance day to day public spending with tax revenues by the end of the decade.
Economists have said she may have to announce further tax increases to stay on track to hit those targets after recent decisions by the government to water down its plans for savings in welfare spending.
($1 = 0.7288 pounds)
(Writing by William Schomberg; Editing by Alison Williams)
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