Yesterday’s borrowing figures mean the fiscal hole is much bigger than expected. Eye-watering cuts will have to be continued into the next parliament if the chancellor is to eliminate the structural deficit.
With just two weeks to go before he delivers the crucial Autumn Statement there was disappointing economic news for George Osborne yesterday, as public sector borrowing came in higher than expected. The government is now borrowing just over 10% more than it was this time last year, once one-off benefits to the government finances – such as the transfer of the Royal Mail plan – are excluded.
If this trend continues, borrowing for 2012/13 is likely to exceed the March projections by the Office for Budget Responsibility – the independent watchdog – by over £12bn.
The chancellor’s fiscal mandate to eliminate the structural deficit – the part of the deficit that remains once the economy has recovered – was already in trouble. In 2010, the coalition came into power with the aim of repairing the public finances, and set out a plan for how this was to be done.
But only a year later, in November 2011, the OBR was already warning that, due to developments in the economy, the government would not achieve its goals without more cuts or tax rises. In response, it scheduled in more cuts to come in the next parliament, after 2014/15. With these in place, the OBR’s March 2012 forecast suggested that the government would be running a surplus by 2016/17.
But there was more bad news to come. Last week, the Social Market Foundation published analysis showing that if the OBR bases its next assessment of the government finances on the models it has used to date, it is likely to alert us to an even bigger fiscal hole. This is because, when updated with the latest data, the OBR models are likely to show that the economy has far less space to grow than previously thought. This is crucial, because it implies that George Osborne will have to rely much less on economic recovery to reduce the deficit, and much more on cuts or tax rises.
Last week, our analysis showed that the OBR’s upcoming report in December is likely to conclude that the government’s structural deficit is 1.1 percentage points of GDP larger than previously thought. In addition to the cuts already pencilled in, this meant that without further tax rises, government would have to find a way of cutting annual public spending by £48bn in the next parliament to keep its plans on track. But yesterday’s borrowing figures now make that assessment optimistic.
These new figures suggest that the government will have to cut £52bn from annual public spending in the next parliament – an eye-watering amount. Even if it loosens its fiscal policy stance and aims to only just hit its target of eliminating the structural deficit within a rolling five year period, it will still have to find cuts of £37bn to annual public spending.
The OBR models may be wrong on the state of the economy and its potential to grow. Other forecasters are more optimistic about the economy’s prospects and the OBR may choose to use its judgement on 5 December to make a less downbeat assessment than its models suggest, thereby softening the blow for the chancellor. But it would be hard for the OBR to completely ignore its own calculations. Either way, it seems certain that the OBR will conclude that the fiscal hole is now much bigger than expected, and yesterday’s news made it even worse.
Nida Broughton is senior economist at the Social Market Foundation and is a co-author of its recent publication Fiscal fallout.
