OBR overestimated business investment in UK recovery forecasts

Robert Chote, the OBR's director, suggested weaker than expected private investment growth may be down to sub-par profits and uncertainty about government policy. Photograph: Lewis Whyld/PA

Flatlining investment by Britain's battered businesses was the main reason the independent Office for Budget Responsibility drastically overestimated the likely strength of the economic recovery, it conceded in its latest forecast review.

The OBR, set up by George Osborne to provide a check on Treasury number-crunching, said in its annual forecasting evaluation report that when it set out the expected path for the recovery in June 2010, shortly after the coalition came to power, it was projecting that business investment would bounce back strongly, as in previous recoveries.

Instead of the 8.9% rise in real GDP since mid-2010 the OBR had forecast, growth had been just 3.2% by the second quarter of this year; and instead of expanding by 4.2% in real terms, private investment has declined by 0.4%. What recovery there has been since 2010 has been dominated by a jump in private consumption.

The OBR's director, Robert Chote, suggested several reasons for weaker-than-expected private investment growth, including sub-par profits, and uncertainty about government policy.

Lack of a recovery in business investment, which fell by 8.5% over the past year according to the latest official figures, has not just stymied forecasters, but alarmed analysts hoping for a rebalancing of the economy away from consumption, towards a Britain that can "pay its way in the world," as George Osborne has put it.

However, the unfavourable balance of the recovery has been better news for the Treasury's coffers, since consumer spending is likely to be taxed more heavily – through VAT, for example – than business investment, which can be offset against tax.

Chote said that helped to explain why despite the OBR's 2010 forecasts being over-optimistic on the likely pace of the recovery, the deficit had come in almost as expected.

The OBR director also repeated his assessment from last year, that its forecasts had not been blown off course by a larger-than-expected hit to growth from the government's deficit-cutting strategy.

A Treasury spokesman welcomed the report, saying, "when it comes to the reasons for slower-than-forecast growth in the UK over the last three years, [the OBR's] conclusion remains the same as last year: there is no convincing evidence that the impact of the government's deficit reduction plan has been larger than the OBR originally expected in 2010."

However, the OBR also sought to explain why the 2012-13 budget deficithad come in lower than expected in the forecasts published alongside the March budget, at £115.7bn, against £119.9bn. It found one key factor was that the Treasury had deliberately intervened, "bearing down on" Whitehall departments to encourage them to spend less than they had been allocated.

"Borrowing would have been on course to rise over the year. But the government chose to offset most of the impact on the deficit by bearing down on spending by central government departments," the OBR said.

Underspending had traditionally been a result of unexpected changes in departments' plans; but Chote said that like any forecaster, the OBR's job had been complicated by recent large-scale revisions of GDP data by the Office for National Statistics, which saw the early-1990s recession become shallower, and the 2008-09 downturn even deeper, than previously thought.

"History is being rewritten year by year, even two decades later," he said, "for many years to come, these are early drafts of economic history.