Borrowing up by an extra £111bn
Tuesday 29 November 2011
The Government is set to borrow £111 billion more over the next five years than previously expected, according to forecasts by the independent tax and spending watchdog, as the UK moves to the brink of a double-dip recession.
The surge in borrowing expectations came hand in hand with downgraded forecasts for gross domestic product (GDP) growth, with the Office for Budget Responsibility now predicting a 0.9% rise this year (down from 1.7% in March), 0.7% in 2012 (down from 2.5%) and 2.1% in 2013 (from 2.9%).
The increased pressure on public finances means the Government will meet its key target of eliminating the structural deficit - the share of the budget deficit that would remain after the economy recovers - later than expected, Chancellor George Osborne warned.
He said: "Borrowing is coming down. It's not happening as quickly as we wished because of the damage from the ongoing financial crisis."
The OBR based all its forecasts on the assumption that the eurozone crisis - which has frequently been cited by the Government and Bank of England as a key threat to the UK recovery - will be resolved.
Looking further ahead, the OBR reduced its forecast for GDP growth for 2013 to 2.1% from 2.9%, and to 2.7% from 2.9% in 2014.
Public borrowing for this year is set to overshoot its target of £122 billion by £5 billion to £127 billion and an extra £19 billion in 2012/2013 to £120 billion and an additional £30 billion in 2013/2014 to £100 billion.
The OBR then increases its borrowing estimate for 2014/15 by £33 billion to £79 billion and by £24 billion in 2015/2016 to £53 billion. This brings the total additional borrowing expected for the next five years to £111 billion.
The structural deficit will not be eliminated until 2016/2017, the OBR said, two years later than its March forecast of turning a structural surplus in the financial year 2014/2015.
The unemployment rate is also expected to increase from 8.1% to 8.7% next year, according to the OBR, squeezing the public purse as more jobseekers turn to the state for help.
Howard Archer, chief UK and European economist at IHS Global Insight, said the near-term growth forecasts look realistic but longer-term estimates may prove hard to achieve.
He said: "This suggests to us that the Government could well struggle to achieve its longer-term fiscal goals even though the targets have been raised markedly."
The Chancellor frequently hailed Britain's low implied borrowing costs as a reflection of Britain's position as a safe haven for investors amid the eurozone turmoil.
The yield on 10-year bonds in the UK is 2.22%, below the OBR's March forecast for a 3.8% average, and lower than the equivalent rate for Europe's largest economy Germany, which is at 2.31%.
As long as yields do not jump, this would save the Government an additional £22 billion on debt interest by 2015/2016, compared to the OBR's March forecast.
Jonathan Loynes, chief European economist at Capital Economics, said the Chancellor has stuck close enough to his plans to maintain the UK's status as a "safe haven".
But he warned: "Looking ahead, we expect further growth downgrades to push the borrowing forecasts even higher in future budgets and statements, deepening concerns about the UK's fiscal position and testing Mr Osborne's commitment to his own rules."
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