Osborne ‘vague on UK finances’

GEORGE osborne was yesterday accused of being ‘ less than crystal clear’ over the parlous state of Britain’s battered public finances. The Chancellor sprung a surprise in the autumn statement on Wednesday by revealing that borrowing will fall again this year – despite widespread predictions to the contrary.

But the Institute for Fiscal Studies said that without some smart accounting to flatter the figures the already bleak situation would look even worse.

‘one could be forgiven for finding the Chancellor’s speech less than crystal clear on the numbers for this year,’ said Paul Johnson, head of the highlyrespected think tank.

The autumn statement forecasts, published by the office for Budget Responsibility, show borrowing falling from £121bn last year to £108bn this year – confounding expectations of a rise.

But the IFS said that once osborne’s raid on surplus quantitative easing funds sitting at the Bank of England was stripped out borrowing this year would be £120bn.

That is the same figure as predicted in March and just £1bn less than last year.

‘It could very, very easily go the wrong way at Budget time,’ said Johnson, warning that the Chancellor’s claim that the deficit is ‘ coming down this year and every year of this Parliament’ could be premature.

The IFS also said that borrowing would have been higher than last year if the Treasury had not booked a £3.5bn windfall from the sale of the 4G mobile phone spectrum and £7.5bn of underspend by Whitehall.

And borrowing over the next four years looks set to be £64bn higher than forecast in March – with nearly £50bn of the overshoot coming in the first two years after the general election in 2015, according to the oBR. The underlying figures from the IFS are even worse.

Whichever way you look at it, said Johnson, the news was ‘bad’.

The plan to cut the deficit was blown off course by the realisation that the economic recovery will be far slower than previously thought. In a wry dig at the Chancellor ( pictured right), the IFS questioned whether his plan was to ‘keep calm and carry on borrowing’.

In its own red ink drenched report, the oBR said it now expects output to shrink 0.1pc this year rather than grow by 0.8pc.

Growth for the next two years was downgraded from 2pc and 2.7pc to 1.2pc and 2pc and by 2016-17 the economy is set to be 3.6pc smaller than expected at the time of the last Budget in March.

The impact on tax receipts is severe – and leaves a gaping black hole in the public finances.

The oBR now reckons the taxman will collect £633bn in 2015-16 – or £31bn less than expected just nine months ago. Income taxes will be £ 9bn lower, national insurance nearly £8bn lower and corporation tax more than £7bn lower.

Against this backdrop, osborne was forced to abandon his plan to put the national debt as a proportion of national income on a downward trajectory in 2015-16.

He now says it will happen a year later – but the failure to hit the target could lead to a humiliating downgrade to Britain’s AAA credit rating.

‘The public finances are in a very, very grave state indeed. I think we will be downgraded,’ said Ruth lea, economic adviser to the Arbuthnot Banking Group.

Despite taking the axe to the economic outlook, many observers believe the oBR’s growth forecasts of 2.3pc, 2.7pc and 2.8pc in 2015, 2016 and 2017 are too good to be true.

‘The oBR still looks too optimistic,’ said Scott Corfe, an economist at the CEBR think tank. He said business investment was unlikely to grow by 8.1pc in 2014 let alone by more than 10pc in 2015 and 2016. He also said consumer spending growth of nearly 3pc in 2017 was ‘unlikely’.

If he is right, the public finances will take another dramatic turn for the worse.

‘our forecasts suggest that the Chancellor will miss his borrowing target for 2017-18 by over £40bn,’ said Corfe.

Michael Saunders, an economist at Citi, also warned that ‘the economy will probably be even weaker than the oBR expects’.

Citi is predicting growth of just 0.8pc in 2013, 1pc in 2014, and 1.2pc in 2015.

‘As a result, we expect that fiscal deficits in coming years may well turn out a bit above the oBR’s new forecasts,’ said Saunders.

The Chancellor has already given up hope of restoring the economy to health by the next election, instead pushing out austerity until 2018.

But despite playing a bad hand well in the autumn statement – raising the personal tax allowance, scrapping the planned increase in fuel duty, and cutting business taxes – osborne faces a real danger that the squeeze will last even longer than that.

The public finances remain in a truly awful state – and there would be no surprise if they get very much worse.