Autumn Statement: Government borrowing to drop

7 December 2012

Government net borrowing has been predicted to unexpectedly fall this year to £108 billion, the Office of Budget Responsibility (OBR) said on Wednesday.

Chancellor George Osborne announced the reduction in his Autumn Statement, but the calculations have been met with shock ­if not disbelief - from experts who had expected it to be upgraded from the March forecast of £120 billion.

However the figures are skewed by Post Office pension scheme transfers onto the government's balance sheet and previously off-balance sheet items such as bail-outs for Northern Rock and Bradford & Bingley now being accounted for.

These new measures muddy the OBR's predictions for public sector net borrowing (PSNB) in the years ahead. Next year it will be £1 billion more than forecast last March (£98 billion), but the figures escalate exponentially in future years. In 2014/25 PSNB will be £88 billion (previous forecast £75 billion); £73 billion in 2015/16 (up from £52 billion); £49 billion in 2016/17 (previous £21 billion) and a new forecast for 2017/18 of £31 billion.

The Chancellor's cheerleaders will be buoyed by the news that the deficit is expected to fall from 7.9% to 6.9% of GDP this year, and to continue falling to 1.6% by 2017/18.

However, there was no surprise that the target to get debt falling as a percentage of national income by 2015-16 will not be achieved.

Osborne said a further year would be required to hit this milestone with this year's figure rising to 74.7%. It is not forecast to start falling until 2016/17, and then by only 0.7 percentage points to 79.2% of GDP and 77.3% of GDP in 2017/18.

Growth figures also proved fodder for the opposition as the OBR's previous prediction of 0.8% growth in GDP for the current year has been revised down, with the body now predicting a 0.1% contraction.

Figures for the following two years are in line with the Bank of England's November revised-down predictions of 1.2% in 2013 and 2% in 2014. OBR had forecast 1.3% and 2.7% respectively.

In future years forecasts have also been trimmed for growth of 2.3% and 2.7% in 2015 and 2016, down from the OBR's March forecasts of 3% in both years.

The worry for the Chancellor will be that the OBR has got predictions wrong every year of its existence, consistently over-estimating growth, despite the independence of the body. It has had to radically downgrade forecasts to match realities as expected investment and growth have failed to materialise.

The 1.2% growth that is expected next year is well within the margin of error and the Chancellor will be hoping that this prediction is not inflated.

As expected, the government will continue with its "Plan A" of spending cuts and tax rises to deal with the deficit and will extend this fiscal consolidation for another year, to 2017/18, to deal with its failure to tackle the debt.

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