Chancellor Jeremy Hunt has been told that economic recovery will be more sluggish than first thought and making it more likely that he will seek further savings in the forthcoming Budget.

The Office for Budget Responsibility (OBR) is said to have to the Treasury that it overestimated the prospects for medium-term growth in the economy.

This would limit Mr Hunt’s options for easing the tax burden on businesses and households.

In November the OBR forecast that while the economy would shrink by 1.4% this year it would pick up next year, with GDP averaging about 2.6% over the rest of the forecast period.

But The Times reports that the OBR intends to reduce its forecasts by between 0.2% and 0.5% due to weakness in the economy and shortages in the labour market.

It now believes that, while any recession this year will be “shorter and shallower” than expected, the long-term economic prospects are bleaker.

The forecasts are significant because they could require Hunt to pencil in further savings in his March budget to keep within the fiscal rules he set in November to reduce debt.

Mark Carney, the former governor of the Bank of England, said yesterday that the UK was in the “most difficult” position of all the major world economies.

He told LBC radio: “Everybody’s been hit — some countries more than others — by the energy shock, the UK certainly has been hit by the aftermath of Covid, it’s been amplified by the separation from the European Union and the combination of those factors have weighed on the economy.”

Tory MPs and business groups want Mr Hunt to use the budget to announce targeted tax cuts to stimulate growth.

The CBI this week warned that UK risks falling into a pattern or low growth unless there is immediate action.

However, there is nervousness in Westminster that tax cuts could repeat the errors of the short-lived Truss administration.

North of the border, the Scottish Fiscal Commission says weak economic growth may be responsible for ministers losing out on almost £700 million of income tax revenue.

Its finding comes after the parliament’s finance and public administration committee warned the Scottish government is already “firefighting on a number of fronts” but has yet to come up with clear plans to reform public finances.

A report by the Institute of Fiscal Studies suggests that rising spending on health and net-zero could require Holyrood ministers to cut other budgets by 13% by 2027.

More evidence that inflation is falling

One piece of good news came from the Office of National Statistics which said factory gate prices at the end of last year fell by their biggest margin since the first lockdown in the latest sign that inflation is slowing.

Output prices for producers fell by 0.8% between November and December, said the ONS.

It is the lowest monthly level since April 2020, when the UK entered its first coronavirus lockdown, and follows a 0.1% decreas between October and November.

Inflation has fallen from a 41-year high of 11.1% last October to 10.5% in December.

Insolvencies rise

The squeeze on company costs was behind a sharp rise in a 13.3% rise in corporate insolvencies (liquidations and receiverships) in Scotland for Q3 2022-2023 compared to the previous year.

Richard Bathgate, chairman of insolvency and restructuring trade body R3 in Scotland and restructuring partner at Johnston Carmichael, said: “The quarterly and yearly rise in corporate insolvencies has largely been driven by an increase in compulsory liquidations, which have increased by 72% from the same time last year. 

“This suggests that companies across the supply chain are feeling the pinch and that creditors are now prepared to take the legal route to recover the debts they are owed, perhaps in order to pay their own bills and satisfy their own creditors.

“Prices at the pump are starting to come down, but consumers are still battling against sky-rocketing household energy bills – an issue which is only set to get worse in March when the energy support scheme comes to an end.”