U.K. Chancellor of the Exchequer George Osborne attends the launch of the National Loan Guarantee Scheme on March 19.
U.K. Chancellor of the Exchequer George Osborne attends the launch of the National Loan Guarantee Scheme on March 19.

Story highlights

George Osborne to be told by Office for Budget Responsibility that he will have to plug another large hole in public finances

This will extend austerity until 2018 and throw coalition's deficit reduction strategy into doubt

Higher borrowing means OBR will likely say government will miss its supplementary target of decreasing public debt

(Financial Times) —  

George Osborne is set to be told this autumn by the Office for Budget Responsibility he will have to plug another large hole in the public finances, extending austerity until 2018 and throwing the coalition’s deficit reduction strategy into doubt.

Higher borrowing in the years ahead make it probable the OBR will say that the government is likely to miss its supplementary target to see the burden of public debt falling by 2015-16 and if recent weakness in the growth of the economy continues, the target will also be under threat the following year in 2016-17.

The Financial Times has replicated and extended the central element of the OBR’s economic model, which suggests the independent fiscal watchdog will again have about £15bn of bad news to impart to the chancellor for his 5 December Autumn Statement.

The findings will heap further pressure on Mr Osborne, as he prepares to make his speech at the Conservative party conference today, and will fuel Labour’s claims that his deficit reduction plan is off course.

Increased public borrowing this financial year alongside little widening in the estimated amount of spare capacity will prevent the OBR forecasting a period of rapid catch-up growth to cut the deficit without further spending cuts or tax increases.

The scale of the structural problem is close to £15bn a year, indicating that austerity will have to last until 2017-18, three years longer than Mr Osborne suggested in his emergency Budget in 2010. It will mean that the total squeeze on households from tax increases and the public sector will last eight years.

Mr Osborne will acknowledge the scale of the problem in his speech; he and Iain Duncan Smith, work and pensions secretary, will confirm they are looking for new savings of £10bn in the welfare budget by 2016-17.

Mr Osborne will also say the rich should pay more towards cutting the deficit, but will insist it is an “economic delusion” to think the books can only be balanced by targeting the wealthy.

The OBR’s likely assessment this autumn will force Mr Osborne to decide whether to ditch his debt rule – as condoned by Sir Mervyn King, Bank of England governor, last month – or impose greater spending cuts or tax rises before the next election.

The key difficulty for all forecasters in recent months has been that with employment strong amid general weakness, it is nearly impossible to suggest the most likely outcome is rapid catch-up growth that will cut the deficit without tough choices by government.

Stephen King, chief economist of HSBC, said the root of the problem was that “people have been very slow to cotton on to the fact that underlying growth is slower than people expected”.

The coalition is most likely to repeat its last year’s policy and delay the bulk of new spending cuts and tax rises until well after the next election. Repairing a new £15bn hole immediately would require the equivalent of a 3p in the pound increase in VAT to 23 per cent.

But the chancellor is considering earlier action, such as limiting the annual uplift of some social security benefits to reduce public spending.