Stagnation not due to austerity, says OBR Deficit reduction is not the main cause of weak economic performance over the past two years, Britain's official fiscal watchdog said on Tuesday, in a report that came as a relief to the Treasury. In its annual evaluation of its forecasting record, the Office for Budget Responsibility said "unexpectedly stubborn inflation" and weak export markets were the most likely reason for its far too optimistic view on growth in 2010. The OBR's conclusions imply the watchdog will not revise down its future growth forecasts in December as a result of austerity measures. The Treasury welcomed the independent report's conclusions on the effects of deficit reduction but George Osborne, chancellor, is still braced for a bleak message from the OBR at the time of the Autumn Statement on December 5. The watchdog is likely to conclude that the Treasury is set to miss its 2015-16 public debt target and will be forced to extend austerity for a third year. Answering questions about the importance of austerity in Britain's two-year stagnation, Robert Chote, chairman of the OBR, said: "Fiscal consolidation doesn't look like the explanation you would jump at first." But he added that the evidence was not yet sufficiently strong to rule out the possibility that austerity was hitting the economy harder than originally thought. The OBR found that the economy had grown only 0.9 per cent between the start of 2010 and the second quarter of 2012, while its June 2010 forecast was for 5.7 per cent growth over the same two and a half year period. Its error was split almost equally between a shortfall of household consumption at the start of this period, weak business investment throughout the period and, more recently, disappointing exports. The OBR blamed consumption and trade weakness on higher inflation than expected, since its forecasts for the cash level of both were almost spot on while there was a significant shortfall in the inflation-adjusted numbers. Mr Chote said that "unexpectedly stubborn inflation" implied that the forecast level of spending bought fewer goods and services than expected. Over-optimism on business investment was harder to explain, the OBR said, as it appeared in both the nominal and real measures of gross domestic product. "It would be hard to distinguish between the fiscal consolidation having a greater impact than expected [on business investment] and other factors, such as anxiety regarding the stability of the eurozone and the ongoing disruption of the financial sector," the report said. Although the OBR's growth forecasts went seriously awry, its estimates of the budget deficit for 2010-11 and 2011-12 were much more accurate, something Mr Chote attributed to higher inflation and nominal growth driving relatively buoyant tax revenues. The OBR's fiscal forecast is unlikely to last into 2012-13, however, as further economic weakness, weak nominal gross domestic product growth and slow corporate tax growth, particularly from North Sea oil companies, have darkened the outlook. The watchdog's view will not be the final word on a subject that hit the headlines last week after the International Monetary Fund mused that everyone might have been too sanguine about the effects of austerity in 2010. In contrast to the IMF's estimates, which were based on evidence from a small sample of countries, the OBR chose to examine its forecast errors in great detail. Although evidence suggested the fund's work lacked its usual rigour, Ed Balls, shadow chancellor, called for urgent action to revive the economy because the IMF "has concluded that deep tax rises and spending cuts will have a much more negative impact on economies than it previously thought."