The UK’s fiscal watchdog has admitted it has been too optimistic in its growth and borrowing projections, in the clearest signal yet that it will deliver gloomy budget forecasts to Chancellor of Exchequer Jeremy Hunt.

In its forecast evaluation report published on Tuesday (Jan 31), the Office for Budget Responsibility said it has an “optimism bias” that typically overestimated GDP growth by 0.5 percentage points.

The admission suggests the OBR is reviewing its assumptions on how quickly the UK economy can grow as it prepares new forecasts for the budget on March 15. 

The independent arbiter of the public finances is expected to predict that weak productivity and labour supply problems will weigh on potential growth, limiting Hunt’s room for tax cuts or spending increases.  

Its forecasts have been closely watched since the OBR was sidelined by former Chancellor Kwasi Kwarteng last year before he announced tens of billions of pounds of unfunded tax giveaways, triggering market turmoil. 

The OBR said it has previously overestimated three-year-ahead GDP growth by 0.5 percentage points and underestimated borrowing by 1.1 per cent of GDP.

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It highlighted its errors on the economic impact of the pandemic and overoptimism over predicting a recovery in productivity growth following the financial crisis. More recently, the OBR has been too hopeful in expecting a rebound in the labour force following the pandemic, with worker shortages still plaguing the UK economy. BLOOMBERG