Budget forecasts for a rapid economic recovery – attacked as over-optimistic by critics – were defended by a Treasury mandarin yesterday as “reasonable” given the UK’s past experience of downturns.
Chancellor Alistair Darling has faced accusations of “wishful thinking” for predicting the UK economy would begin to recover by the end of this year, before growing 1.25 per cent in 2010 and by 3.5 per cent the following year.
But the International Monetary Fund forecasts a further fall in 2010 while official estimates show a worse-than-expected 1.9 per cent decline in the first quarter of 2009.
The Conservatives also slated the Budget for being based on “fantasy forecasts” but the Treasury’s chief economic adviser Dave Ramsden said the latest official forecasts were “reasonable”.
He told the Treasury Select Committee the UK grew at a rate of 3.25 per cent for five years in the 1990s when coming out of the recession at the start of that decade. He said current predictions were “reasonable from the economics and the past experience of the UK” as spare capacity in the economy begins to be taken up again.
“I would absolutely stand by the judgment that we have made in our forecasts,” Mr Ramsden said.
He said there had been “mixed messages” from recent data after retail sales figures showed growth. But factors such as interest rates at historic lows, boosting the money supply through quantitative easing, the pound’s weakness and fiscal stimulus measures would bring about a swift recovery.
“The forces that are underpinning a potential recovery are in place for Q4 (the last three months of 2009)... All those forces will help lead to a pick-up in GDP towards the end of the year,” he said.
But he also said there were “significant downside” risks to the Treasury forecasts and warned of the difficulty of making economic predictions in the uncertain environment. “It is no doubt very challenging to forecast what is happening in the economy at the moment,” he said.