By David Milliken and Matt Falloon
LONDON (Reuters) - Britain's newly created budget watchdog downgraded economic growth forecasts Monday but did not radically alter the scale of austerity measure required from the country's coalition government.
Britain's economy will grow more slowly after this year than the previous Labor government expected but state borrowing will fall a bit faster than originally thought, the Office for Budget Responsibility said.
Its first pronouncement set the scene for the new Conservative-Liberal Democrat coalition's emergency budget on June 22.
Britain has a record budget deficit, running close to 11 percent of gross domestic product, and the coalition is under pressure to reassure markets it will slash borrowing given fears of contagion from the euro zone fiscal crisis.
The OBR, created shortly after the coalition took office last month, said the economy should grow 1.3 percent this year, in line with previous forecasts, but growth would only rise to 2.6 percent in 2011.
Labor, which had been accused of adopting an overly optimistic outlook, had expected the economy to grow between 3 and 3.5 percent next year. The OBR also penciled in slower growth than Labor for the years ahead.
Nonetheless, the OBR stressed the uncertainty surrounding any economic forecasts. "All ... forecasts will be wrong, though some will be more wrong than others," said the head of the OBR, former finance ministry official and central bank policymaker Alan Budd. "It's our best shot at an impossible task."
The OBR, which uses its new central forecast for growth rather than more pessimistic estimates used in the March 2010 budget, expects public sector net borrowing to fall slightly faster than predicted in Labour's last budget.
Stronger tax receipts since the March budget have also helped the borrowing profile, the OBR said.
SLIGHTLY BETTER BORROWING
Sterling rose against the euro and the dollar and British government bonds trimmed losses after the overall downward forecast to the UK debt burden.
Markets, rattled by the euro zone fiscal crisis, are on alert for any sign that borrowing levels are getting out of control. But analysts were more sanguine.
"There are really no big obvious surprises. The growth numbers were expected to be revised down and the public finance numbers have been coming out better than expected," said Amit Kara, an economist at UBS.
"We have to understand that the OBR is really just another forecasting body and its forecasts are just as vulnerable to being right or wrong as any other respected body."
Public sector net borrowing is expected to come in at 155 billion pounds ($227 billion) -- or 10.5 percent of national output -- in the fiscal year 2010/11, compared with previous forecasts for 163 billion pounds.
By the end of this parliament in 2014/15, that ratio is seen falling to 3.9 percent -- only slightly lower than the 4 percent predicted in March.
Borrowing on a cyclically-adjusted basis, however, will fall more slowly.
"The Chancellor (finance minister George Osborne) ... is facing a very similar outlook to the picture in the March budget," said George Buckley, an economist at Deutsche Bank.
"The structural deficit is slightly worse, so they might have to do a bit more than they would have had to in terms of the structural adjustment."
(Editing by Ruth Pitchford)
