By Richard Johnstone | 23 April 2012
Government borrowing is set to be almost £70bn higher than estimated in the Budget, according to an economic think-tank.
The Centre for Economics and Business Research warns that high inflation will lead to sluggish economic growth until 2016.This means Chancellor George Osborne would overshoot the borrowing figures set out in last month’s Budget.
In his March 21 speech, Osborne told MPs that the latest forecast from the Office for Budget Responsibility was for the deficit to fall to £21bn in 2016/17. But the CEBR says that borrowing will be £90bn that year because of ‘sluggish’ growth in tax revenues.
The think-tank’s quarterly United Kingdom Prospects report increases its estimate for gross domestic product growth in 2012 to 0.3%, up from a 0.4% contraction it predicted three months ago.
However, it adds that high inflation will make it ‘difficult to achieve rapid GDP growth in the medium term’, with the economy expanding by just over 1% a year for the period to 2016.
Its report also predicts that inflation will remain above the Bank of England’s 2% target for the Consumer Prices Index over the next three years.
Figures published last week by the Office for National Statistics revealed that the CPI measure rose to 3.5% in March from 3.4% in February.
Today’s report estimates that inflation will be 2.7% in the fourth quarter of this year, up from a previous projection of 1.7%, and will remain ‘stubbornly high’ due to increases in oil and commodity prices.
Fears over inflation mean the Bank of England will halt its quantitative easing scheme when the current £50bn programme of asset buying ends next month, the centre concluded.
Senior economist Scott Corfe, the main author of the CEBR report, said: ‘The [Bank of England’s] Monetary Policy Committee has been dealt the worst possible hand of cards. High inflation and sluggish growth on a persistent basis mean that almost any decision the committee makes will be wrong from at least one point of view. They will probably hold base rates until 2014 at least, and hold back on further QE. But even that may not be enough to keep inflation near target or achieve economic growth at a reasonable rate.’
Chief executive Douglas McWilliams added that inflation being above target ‘is a price we may have to pay for some time’.
He said: ‘The chancellor made announcements in the last Budget which could help the UK escape from stagflation with proposals for lower top tax rates, revised planning procedures, more airport capacity in the Southeast and a more pro-growth energy policy.
‘If these are followed through, there is the prospect of faster GDP growth than we are currently predicting. But with pervasive anti-business attitudes amongst the public and a weak coalition government, we will need to be convinced that these proposals will actually be implemented sufficiently soon to affect growth.’
