UK will break Darling's debt promise, warns think-tank

Chancellor will not halve debt by 2013-14, economics institute experts forecast
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The Independent Online

Government tax and spending plans will not be sufficient for it to keep the promises it has made to cut the national debt, one of the UK's most influential think-tanks warned today.

The National Institute of Economic and Social Research (Niesr) said the plans announced so far by Alistair Darling would see the Chancellor fall short of his aim of halving the budget deficit as a proportion of national income by the 2013-14 financial year, despite the Government having pledged to enshrine that commitment in law.

Niesr predicted that even with further tax rises or spending cuts – inevitable in the think-tank's view – net borrowing would still be 6.8 per cent of GDP in 2013-14 – well above the 5.5 per cent to which the Government must get in order to keep its promise.

The widely respected think-tank also warned that Mr Darling's existing plans would see total public debt as a proportion of GDP continue rising, rather than beginning to fall from the middle of this decade onwards, as the Treasury's projections show. Simon Kirby, of Niesr, warned: "Public borrowing in 2013-14 will be 1.3 percentage points higher than the Treasury is forecasting, and net debt as a share of GDP will not start to fall in 2015-16."

The warning will be a major blow to Mr Darling, who is under huge pressure to spell out how he would get on top of borrowing following the general election. His political opponents, led by George Osborne, who has accused him of being too slow to act on the deficit, will seize upon the report.

The forecasts will also undermine the Chancellor's insistence that Britain's prized AAA credit rating is not under threat. The Treasury says Britain's debt as a proportion of GDP will rise to 77.7 per cent in 2015-16, before starting to fall; Niesr's claim that this is unrealistic makes it more likely that Britain's credit rating could be lowered.

Niesr also said today that the pace of Britain's economic recovery would pick up following the 0.1 per cent rise in GDP initially estimated for the fourth quarter of 2009, though it expects total growth of only 1.1 per cent to 2.0 per cent over the next two calendar years.

That modest forecast is in line with the latest economic data, which paints a patchy picture of the recovery. A survey, published yesterday, of purchasing managers in the construction sector suggests the industry's activity contracted for the 23rd month running during January, albeit at a slower pace. By contrast, the manufacturing sector, which reported on Monday, seems now to have moved into recovery mode.

In the dominant consumer sector, Nationwide Building Society said today that its latest survey of confidence revealed an improvement last month, while hopes for the employment market were boosted by research from KPMG showing that recruitment consultancies are continuing to see a pick-up in demand for staff from clients.

Against this backdrop, the Bank of England's Monetary Policy Committee begins its latest monthly meeting this morning, and will announce tomorrow its decisions on any changes to interest rates or quantitative easing.

The MPC had been expected to say that with the £200bn QE budget now exhausted and the economy in recovery, the policy would be suspended. However, the unexpectedly weak GDP figures for the fourth quarter of 2009 have led some analysts to speculate that the MPC might now extend QE, with the Bank's Governor, Mervyn King, requesting permission for another expansion of the programme.

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