George Osborne’s hopes of cutting the deficit in 2012/13 are fading fast, the Chancellor’s own watchdog has conceded.
After digesting January’s disappointing public finances, the Office for Budget Responsibility said that there would need to be an implausibly large surge in tax revenues into Government coffers or a significant drop in state spending over the final two months of the financial year for Mr Osborne to live up to his boast made in December that the deficit would still fall in cash terms in 2012/13.
In December the OBR predicted that even excluding one-off accounting changes that will flatter the public borrowing figures this year the deficit would decline from £121.5bn in 2011/12 to £119.8bn in 2012/13. This forecast came as a major surprise to most economists because the public finances had been deteriorating for the first half of the year as the economy slipped into a double dip recession.
But the OBR now appears to have accepted that its December public borrowing forecast was over-optimistic. The watchdog, led by Robert Chote, says that in order to hit the £119.8bn target, borrowing will need to be £6.4bn lower in February in March than it was in the same months of 2012. “To meet our autumn forecast would now require much stronger growth in tax receipts in the last two months of the year than we have seen since December or much lower-than-forecast expenditure by central or local government” the independent watchdog said in a statement.
The verdict follows a blow for the Chancellor earlier this week when Ofcom revealed that auction of the 4G mobile phone spectrum had raised just £2.3bn, rather than the £3.5bn than the Treasury had pencilled in, pushing Mr Osborne further from his deficit reduction target.
Most City and academic economists expect public borrowing for the full year to come in between £5 and £10bn higher the £121bn deficit recorded in 2011/12. If the OBR moves into line with this analysis at the time of the Budget, scheduled for 20 March, the Chancellor will be forced to admit in the House of Commons that he has, despite his December boast, presided over a rise, not a fall, in the deficit.
There was a £11.4bn surplus in the public finances in January, according to the Office for National Statistics. Though this was an improvement on the £5bn surplus recorded in January 2012 this figure was flattered by a transfer of £3.8bn from the Bank of England to the Treasury.
Excluding this windfall, tax revenues increased by just 1.1 per cent which is a considerably smaller improvement than the OBR anticipated in December. January is traditionally a strong month for tax receipts because companies hand over their quarterly Corporation Tax returns in the month. But last month the value of Corporation Tax receipts were 13.5 per cent lower than in January 2012. However, VAT and income tax receipts were up 4 per cent on a year earlier. Total public borrowing for the financial year to January, excluding one-offs, was £97.6bn, £5.3bn more than the same period in 2011/12.
Treasury sources refused to concede that the Chancellor’s deficit reduction pledge would now be missed. A spokesman said: “[The figures] underline what the Governor of the Bank of England said last week: the road ahead will be difficult, but the economy is on the right track.”
But Labour’s Chris Leslie said: “David Cameron and George Osborne are failing on the one test they set themselves – to get the deficit and debt down”.