Slower growth from fiscal tightening will cause the Bank of England to keep interest rates lower for longer, while a further fiscal squeeze could lie ahead if the Office Budget Responsibility’s growth forecasts are too strong.

This is the key conclusion of the Budget Report analysis produced by one of the country’s economics consultancies, cebr, and released in their Emergency Budget Reaction report.

The Budget saw Chancellor Osborne follow through on his commitment to cut the public sector deficit more quickly, with £32 billon of spending cuts and £8 billion of net tax rises announced.

The Office for Budget Responsibility downwardly revised its pre‐Budget forecast for growth in 2011 from 2.6% to 2.3% but we think this and the years following could still be too strong.

The OBR expects consumer spending to grow by 1.3% and 1.7% in 2011 and 2012 respectively. At a time when we expect unemployment to still be rising, real disposable income growth to be weak and bank lending to remain constrained, this seems too strong.

Furthermore, a strong bounce back in private sector investment is expected, but we think investment will recover more slowly in the aftermath of the financial crisis due to constraints in lending. Finally, the sluggish recovery in the eurozone, the United Kingdom’s main export market, will hinder the export‐led recovery.

If growth is lower than the OBR expects, public borrowing is likely to have been underestimated and further spending cuts and / or tax rises could be necessary.

However, we expect the fiscal tightening announced will result in lower long term interest rates as bond markets react positively to clearer plans for reducing the deficit. In addition, the Bank of England may respond to slower growth by keeping interest rates lower for longer.

Charles Davis, managing economist at cebr commented:

“We think the Office for Budget Responsibility’s projections for growth are still on the high side. We see a weaker consumer recovery and more risks to the export led recovery than the OBR.

“Although inflation has been above target in early 2010, the fiscal tightening means growth in demand will be weakened, so we expect the Bank of England to keep interest rates lower for longer, on hold at 0.5% into 2012.”

Douglas McWilliams, chief executive officer at cebr commented:

“Bond markets reacted positively to the Budget today and we think long term interest rates will fall back over the coming months. This is good news for households as mortgage rates should fall back. However, with another VAT rise to stomach households will probably be feeling overwhelmed by bad news.

“The danger is that there could be more bad news to come. If the Office for Budget Responsibility’s growth forecasts turn out to be too optimistic, as we expect, then more spending cuts and tax rises could be necessary.

“Coming out of the financial crisis, we expect growth to average of one and a half percent in the UK over the next three years, whereas the OBR is forecasting a two and a quarter percent growth. If growth is lower, it could mean around £10‐£20 billion more cuts could be required.”

Research from R3, the insolvency trade body, reveals that a far higher proportion of younger respondents are more likely to leave their bills unopened and avoid their creditors than older respondents.

Among those struggling with debt, over a third (36%) of the 18-24 year olds surveyed have not contacted anyone for help as it is ‘easier not to think about it’ compared to just 9% of 55-64 year olds.

In addition 26% of the 18-24 year olds surveyed say they do not open their bills because they cannot face them, whereas this figure drops down to 10% for 65s and over. Similarly 28% of 18-24 years olds surveyed are trying to avoid contact with people they owe money to, whereas this applies to only 11% of 65 year olds and over.

R3’s President Steven Law commented:

“Despite a global recession and near financial meltdown, younger generations are still operating on the basis that high levels of debt are normal and the consequences of this have created a clear generational split. It is extremely troubling that irresponsible attitudes towards debt are entrenched by the age of eighteen as this is likely to lead to a lifetime of financial problems.”

The report also finds:

- Just under a third (30%) of 18-24 year olds cite they ‘don’t know where to go’ as the reason for not contacting anyone for help, compared to 8% of 65 year olds and over.

- Moreover, across all age groups, 44% of those struggling with debts mistakenly believe that debt advice must be paid for.

Steven Law added:

“If nearly half of those struggling with debts believe incorrectly you need to pay for debt advice, we have little chance of resolving this problem. Most insolvency practitioners, for instance, are prepared to provide their time free for a first meeting with a debtor.

“Similarly, the Citizens Advice Bureau will provide free advice.

“In addition, financial advice needs to get away from promoting ‘debt as a way of life’ that some irresponsible lenders use and instead focus on making debt more proportionate to an individual’s financial makeup and so avoid long term financial problems.”

Total UK personal debt at the end of April 2010 stood at £1,460bn, reveal the latest debt statistics from Credit Action.

The twelve-month growth was 0.8%. Individuals owe more than what the whole country produces in a year.

Total lending in April 2010 rose by £0.4bn; secured lending increased by £0.5bn in the month; consumer credit lending decreased by £0.1bn (total lending in Jan 2008 grew by £8.4bn).

Total secured lending on dwellings at the end of April 2010 stood at £1,239bn. The twelve-month growth rate fell to 0.9%.

Total consumer credit lending to individuals at the end of April 2010 was £221bn. The annual growth rate of consumer credit fell by 0.2% to – 0.1%.

Average household debt in the UK is ~ £8,761 (excluding mortgages). This figure increases to £18,252 if the average is based on the number of households who actually have some form of unsecured loan.

Average household debt in the UK is ~ £57,915 (including mortgages). If you add to this the March 2010 budget report figure for public sector net debt (PSND) expected in 2014-15 (excluding financial interventions) then this figure rises to £113,709 per household.