The Chancellor remains on course to meet his deficit-cutting targets but the bulk of the public spending cuts lie ahead, yesterday’s Budget documents showed.
The Office for Budget Responsibility, which monitors the public finances, said it still believes George Osborne will meet his targets of eliminating the structural deficit in five years and putting the burden of the national debt on a downward trajectory.
But despite the pain of the past two years, the Government still faces a huge task. Figures in the Budget red book confirmed that the Chancellor needs to find a total of £155 billion through his fiscal consolidation efforts.
About £41 billion of this will have taken effect by the end of this month, leaving £114 billion for the next five years. Much of this sum must come from spending cuts, with the bulk of the tax rises already in place after last year’s increase in VAT to 20 per cent, said John Hawksworth, chief economist at the accountants PwC. “There is still a long road ahead to fiscal purity,” he warned.
Achieving the Chancellor’s deficit-cutting goals will require an additional £10 billion of welfare cuts by 2016, George Osborne revealed in new analysis yesterday.
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“If nothing is done to curb welfare bills further, then the full weight of the spending restraint will fall on departmental budgets,” Mr Osborne said in his Budget speech.
The government’s finances have begun to show signs of improvement in recent months, partly on the back of spending reductions by departments and local government.
As a result, economists had expected Mr Osborne to have a few billion pounds extra to play with yesterday. But hours before the Chancellor stood up, the Office for National Statistics said that public sector net borrowing totalled £15.2 billion in February, almost double the consensus forecast and the figure recorded in February 2011.
The Government is now expected to undershoot the OBR’s 2011-12 borrowing estimate of £127 billion by only £1.1 billion, instead of the several billion pounds expected by economists.
“Before these data, we expected a £5 billion deficit undershoot and some forecasters expected a much bigger undershoot,” said Michael Saunders, UK economist at the investment bank Citigroup.
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“The UK is on the way back to fiscal sustainability, but the journey is likely to be protracted.”
The Chancellor is under huge pressure to stick to his tough austerity measures after the rating agencies Fitch and Moody’s both put the UK’s prized AAA credit rating on negative outlook.
Mr Osborne insisted yesterday there would be no wavering in his dash for smaller deficits. “To do so would risk a sudden loss of confidence and a sharp rise in interest rates — and we will not risk that,” he said, pointing out that the Government was saving £36 billion in debt interest payments because of low borrowing costs on the national debt.
Many analysts say achieving the deficit-cutting targets will become harder over the remainder of the Parliament, given the sluggish growth outlook. Some cast doubt on the OBR’s economic forecasts, which suggested the economy will grow 3 per cent by 2015 compared with 0.8 per cent this year.
Peter Dixon, an economist at Commerzbank, said: “The broad thrust of the OBR’s forecast remains that the private sector will fill the gap left by the retrenchment of the state sector. We believe this is overly optimistic.”
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The OBR’s work suggested that the government will have to shed even more employees than previously predicted. In November the Office projected a 710,000 fall in general government employment between the start of 2011 and the start of 2017. Yesterday it said it has increased the projected fall to about 730,000 over the same period.
In the short term, borrowing will improve markedly because of the Government’s decision to transfer the Royal Mail’s pension deficit, plus a share of its assets, into the public sector. This will reduce the national debt by about £23 billion from 2012-13. But the OBR stressed yesterday that this was not going to deliver a long-lasting improvement. It said: “The long-term impact is likely to be negative, as the £37.5 billion estimated present value of the transferred liabilities \ exceeds the £28 billion value of the transferred assets.”
By 2016-17, net borrowing will be £21 billion, or 1.1 per cent of economic output, little changed from the November forecast, according to yesterday’s forecasts.