George Osborne faces a potential double whammy of dire news this week that would further ratchet up the pressure on the Chancellor to change his economic course.
The Office for National Statistics will release its estimate of the GDP growth figures for the first quarter of last year, which could show that the UK has slipped into an unprecedented triple-dip recession. The ONS is also due to release the public borrowing figures for the final month of the 2012-13 financial year, with analysts warning of the possibility it could show the annual budget deficit is rising, rather than falling. City analysts expect the March public finances figures, released on Tuesday, to show government borrowing of around £15bn in the month.
This would leave the total deficit for 2012-13 (stripping out all the various distortions such as transfer of interest payments from the Bank of England) at £117bn, around £4bn lower than the £121bn borrowed in 2011-12.
But analysts also warned there is chance that tax revenues could be weaker than anticipated thanks to George Osborne's reduction in the top rate of income tax, which could push total borrowing for the year higher than last year. "It's possible that some people might have moved their income tax payments into the next tax year to take advantage of the 45p rate introduced in April," said Martin Beck of Capital Economics. "That could depress tax revenues".
This would be a political embarrassment for the Chancellor who has gone to extreme lengths to prevent the total deficit rising on last year, including slashing departmental spending in his March Budget and delaying subscription payments to international bodies the World Bank. Even more serious for the Chancellor would be a negative figure for GDP growth in the first quarter of this year, due on Thursday, which would confirm that the UK has entered its third recession since 2008. Although the consensus forecast is for a 0.1 per cent increase in GDP for the quarter, there is a good deal of variation between individual predictions. As a result, analysts say it is touch-and-go whether the economy managed to eke out any growth in the first three months. Although there have been signs the services sector, which accounts for three-quarters of the economy, did not contract between January and March, the general expectation is that construction and manufacturing sectors were a drag on growth. "There is major uncertainty over the likely outturn, given that it is unclear just how much economic activity was hit overall during the first-quarter by the cold weather that occurred in January, and then again in March" said Howard Archer of IHS Global Insight.
Last week the International Monetary Fund slashed its 2013 growth forecast for the UK to just 0.7 per cent and said the Chancellor should consider slowing the pace of spending cuts in order to support the recovery – something Mr Osborne has steadfastly resisted for the past three years.
Furthermore, on Friday Fitch became second ratings agency to remove Britain's top AAA rating, citing "a weaker economic and fiscal outlook". The ratings agency followed Moody's which made a similar cut to Britain's credit rating in February.