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 there would need to be an implausibly large surge in tax revenues or a significant drop in state spending in the next two months for Mr Osborne’s boast, made in December, to be borne out.
The OBR previously 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 it now appears to have accepted that its December public borrowing forecast was too 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 and March than it was over 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,” it said in a statement.
The warning follows a blow for the Chancellor earlier this week when the telecoms regulator Ofcom revealed that the auction of the 4G mobile phone spectrum had raised just £2.3bn, rather than the £3.5bn the Treasury had been banking on. This pushed Mr Osborne £1.2bn further from his deficit reduction target for the year.
Most economists expect public borrowing for the tax year to come in between £3bn and £10bn higher than the £121bn deficit recorded in 2011/12. If the OBR moves into line with this analysis at the time of the Budget, the Chancellor will be forced to admit in the House of Commons that he has in fact presided over a rise 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, the 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 year-on-year – a considerably smaller improvement than the OBR anticipated in December.
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.”