Is George Osborne borrowing more or less? You won’t find a simple answer in today’s papers. The Guardian reports that “Britain will borrow £21.5bn less than previously forecast” but the FT warns that “the black hole in UK public finances has increased by almost £30bn.” Elsewhere, Reuters reports that the Office for Budget Responsibility’s forecasts are expected to show a “borrowing overshoot of at least 86 billion pounds over four years.” Who’s right? The answer is that they all are.
In his autumn statement, at 12:30pm, Osborne will announce that Britain’s record low bond yields have saved the taxpayer £21.5bn, the so-called “safe haven dividend”. Money that would have been spent on financing the national debt can now be spent on enterprise schemes, free childcare, business tax breaks and so on.
But unfortunately for the Chancellor, that’s not the end of story. Owing to lower growth and higher unemployment (which leads to a larger welfare bill), public sector net borrowing is expected to be around £86bn higher (the Reuters figure) than forecast at the time of the Budget in March. Even before today, Osborne was forecast to borrow £46bn more than expected. When the OBR publishes its latest forecasts today, that figure could rise to an enormous £132bn (£46bn + £86bn), taking Osborne’s total borrowing over that planned by Alistair Darling. The Brown government was forecast to borrow £127bn in 2011-12 and £106bn in 2012-13. Osborne is expected to borrow £129bn ths year (up from £122bn) and £117bn next year (up from £101bn). Labour’s smart attack line is that while the Chancellor is borrowing to meet the cost of high unemployment, it would have borrowed to fund growth.
Then there’s the structural deficit, the “black hole” the FT refers to. The structural deficit – the part of the deficit that remains even after growth returns – is now forecast to be £30bn bigger. This is because the output gap – the difference between actual and potential growth – is smaller than previously thought. In other words, the economy is capable of less growth than initially forecast. This can’t be blamed on Osborne’s policies and, worryingly for messrs Balls and Miliband, has implications for Labour’s own deficit reduction plan. It also means that the Chancellor is almost certain to miss his self-imposed target of eliminating the structural deficit before the next election. However, he is still likely to meet his formal fiscal mandate – to eliminate the structural deficit over a rolling five-year period. For example, from today, he has until 2016-17 to eliminate the deficit, from next year, he’ll have until 2017-18. But meeting this target means extending austerity into the next parliament. A structural deficit can only be eliminated by spending cuts and tax rises, so Osborne will go into the next election warning of further pain to come.
The Chancellor’s pledge to eliminate the structural deficit in one parliament was based on a political timetable, not an economic one. By 2015, Osborne envisaged that the Tories would be able to boast that they had cleaned up “the mess” left by Labour – a powerful political narrative – and offer cuts in personal taxation. But, as the grim figures above show, this is now a distant dream.
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