The UK Office for Budget Responsibility (OBR) was formed in May 2010 by the new coalition government, to make an independent assessment of the public finances and the economy for each Budget and Pre-Budget Report. It is being chaired, on an interim basis, by macroeconomic expert Sir Alan Budd. On Monday it cut the forecasts for UK growth in 2011 and in subsequent years as it assessed the previous outlook for the economy to be too optimistic.

The Chancellor of The Exchequer George Osborne  has said he will use these forecasts as the basis for his Budget next Tuesday and the lower medium-term outlook for the public finances suggests he will have to take tougher action on spending cuts and tax increases.

This central forecast - -  the mid-point around which the risks are judged to be balanced  - - shows:  1) GDP growing by around 2½ per cent in 2011 and 2¾ per cent in 2012. 2) Public sector net borrowing (PSNB) of £155bn, 10.5 per cent of GDP, in 2010-11. 3) Cyclically-adjusted PSNB (Public Sector Net Borrowing) -- an estimate of the structural deficit  - - of 8.0 per cent of GDP in 2010-11. The former Labour chancellor Alastair Darling, had predicted the economy would grow by 3.25 per cent in 2011 and by 3.5 per cent in the subsequent three years.

The OBR stresses the uncertainty of its forecasts. This uncertainty is represented by the fan charts in the charts here. On the assumptions made to construct them:

• There is around a 40 per cent probability of GDP growth in 2011 being between 1½ per cent and 3½ per cent.

• There is a 50 per cent probability that public sector net borrowing will be below 4 per cent of GDP in 2014-15.

On the public finances, the OBR acknowledged that tax revenues have been stronger than expected and this is likely to leave borrowing standing at £155bn in 2010-11 and £127bn in 2011-12 compared with Darling’s worse scenario of £163bn and £131bn respectively in the March Budget.

But the lower growth assumption into the medium term slows tax revenue growth thereafter and the borrowing figures are only marginally better by 2014-15. The OBR says it is most likely that the country will still be borrowing £71bn in 2014-15 on unchanged policies, compared with £74bn in the Budget forecast.

Hetal Mehta, Senior Economic Advisor to the Ernst & Young ITEM Club, comments on the Office of Budget Responsibility (OBR) forecast:  "The more realistic growth forecast is in line with our view, and the make-up of the growth is also more plausible now, with less dependence on a consumer-driven recovery. And the downward revision to estimates of long run growth are also more sensible in light of slower population growth and less inward migration.

"The impact of lower GDP growth forecasts, has been partially offset by the downward revision to last year's deficit, leaving the overall PSNB figures slightly lower than that forecast by the previous government, but not significantly different. But the small increase in the estimate of the structural deficit means the government will have to deliver a robust plan for reducing the deficit in a more aggressive manner.

"Credibility will be a key issue in next week's Budget. Any hint that there is a lack of conviction in tackling the huge deficit will undermine market confidence and make it even more difficult to consolidate fiscal policy in the years ahead.

"Credit ratings agencies have so far been patient, but this is a test that the new government cannot afford to fail."