By Richard Johnstone | 1 December 2014
Chancellor George Osborne will be forced to revise up borrowing for the current financial year by £9bn in this week’s Autumn Statement, as stronger growth has not led to revenue increases, the EY ITEM Club has said.
In its preview of Wednesday’s Autumn Statement, the ITEM Club, which uses the same model as the Treasury to forecast the public finances, concluded that this would push the year when a surplus is predicted in the public finances to 2019/20. At the Conservative party conference this year, Prime Minister David Cameron pledged to ‘balance the books' by 2018/19.
However, the ITEM Club stated the ‘fiscal cupboard is bare’, despite the likely upward revisions to the UK economy’s growth forecast by the Office for Budget Responsibility.
The report predicted the OBR would add between 0.25% and 0.5% to its 2.7% forecast for gross domestic product expansion in 2014, however revenues are expected to fall £8bn short of forecast. This means that public sector net borrowing for the year will be revised up by £9bn from the Budget projection of £95.5bn. Larger deficits in future years will push back the planed surplus to 2019/20, while also increasing the amount of spending reductions needed to balance the books.
Martin Beck, senior economic advisor to the EY ITEM Club, said the improvement in the public finances under this government now risked going into reverse.
‘With just five months to go it appears virtually impossible for the government to achieve the OBR’s current forecast for borrowing in 2014/15,’ he added.
According to the report, persistent weakness in income tax receipts is the key factor behind the failure to reduce the deficit. This is due to low wage growth, a shift towards low-paid jobs and forecasts underestimating the impact of large increases in the income tax personal allowance over this parliament. The OBR is likely to revise down its forecasts for revenues throughout the next five years, forcing Osborne to employ further spending restraint in 2019/20.
This means it is also unlikely that the chancellor will be able to repeat announcements at previous Budgets and Autumn Statements of increases in the income tax personal allowance, which has risen from £6,475 in 2010/11 to £10,000 in the current year and will rise further to £10,500 in 2015/16.
However, the ITEM Club said it was likely there would be announcements on devolution of powers to local areas, including transport and greater flexibility over borrowing.
It also predicted there could be announcement of more business rate revaluations, with measures to allow owners of business premises to offset the cost of investment against rates paid also likely.
