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UK Chancellor to boost forecasts but keep belt tight

Chancellor of the Exchequer George Osborne
Matt Cardy | Getty Images
Chancellor of the Exchequer George Osborne

The burgeoning U.K. economic recovery is expected to lead to an official hike in economic forecasts this week, but Chancellor of the Exchequer George Osborne is unlikely to ease much on austerity.

The Chancellor's autumn statement, due Thursday, will be accompanied by revised forecasts from the Office for Budget Responsibility (OBR), economists believe. Since he delivered his last Budget in March, economic data on measures including employment and manufacturing have been better than expected – as Goldman Sachs economists said recently, the U.K. is "one of the most notable economic surprise stories" of 2013. In March, the OBR forecast growth of 0.6 percent for 2013.

"The economy has moved from a state of despair to repair," HSBC economists put it, in a research note where they predicted 2013 gross domestic product growth would hit 1.4 percent.

(Read more: 'Uncertainties' in U.K. recovery)

While this is far from barnstorming, it is still markedly better than previous predictions of sub 1 percent growth, or even a "triple dip" recession.

The U.K. is reshaping its balance sheet more effectively than planned, with HSBC forecasts for public borrowing suggesting that £60 billion less will be borrowed over the next three years than in current OBR forecasts. This has come about because of cuts to spending, and rising tax take from consumer-focused taxes like sales tax VAT and property tax stamp duty. Unemployment is falling more quickly than forecast. Borrowing should work out as £105 billion, 6.4 percent of GDP, in the year beginning April 2013, below the March forecast of £120 billion or 7.5 percent of GDP, according to Berenberg Bank.

Still, the tone from economists remains cautious, and that is likely to be echoed by the Chancellor, who is still aiming for a surplus (where the government would generate more in revenues than it spends) by 2020.

There is a growing gap between the outperformance of London and the South-East, and more depressed areas of the U.K.

(Read more: Scottish independence: Widnae it work?)

Inflation, boosted by unpopular energy price rises, is set to continue to outpace wage growth. And there are continuing concerns that the full effects of the fiscal adjustment have not been felt. Lending to households and small to medium businesses by banks has not recovered as quickly as in the U.S., for example.

"The fiscal squeeze that still lies ahead looks set to be more intense than in most other G7 economies," Samuel Tombs, economist at Capital Economics, warned.

"The conditions required for a sustained and substantial outperformance similar to that seen in the late 1990s are less evident now."

- By CNBC's Catherine Boyle. Twitter: @cboylecnbc

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