The Institute for Fiscal Studies has warned that the Government will have to borrow more than expected this year, and that George Osborne will miss at least one – and possibly both – of his two fiscal rules. How exactly has this happened? Here is the story in three pictures from the IFS report on the autumn statement.
The main reason the public finances will disappoint this year is that the economy is likely to be substantially weaker than expected.
You can see what’s happened in this table: back in March the Office for Budget Responsibility was predicting cumulative GDP growth of 5.5% from 2012 to 2014. The average of independent forecasters today is less than half that, at just 2.6%.
Lower growth means less tax revenue, and potentially more in unemployment benefit payments, which in turn will swell the budget deficit.
What’s less clear is whether that growth that’s been foregone is lost permanently or is merely a temporary aberration, and that the economy will bounce back. So the IFS has provided two scenarios in its forecasts: an optimistic one which assumes that economic disappointment is merely a cyclical (eg temporary) thing, and a pessimistic one which assumes that that GDP is gone forever. Here’s a table of what those scenarios entail.
The big question is whether the Chancellor will break his fiscal rules as a result of all this extra borrowing. The first of the rules is that the cyclically-adjusted budget must be in balance (eg not in negative territory) over the following five years. According to the IFS, the Government can meet this rule under its optimistic scenario, but will break it (eg the cyclically-adjusted budget will be in negative territory in 2017/18 as per the dark grey line).
The second rule says that Britain’s net debt – the total pile of debt built up by Britain over the years – must be falling by the end of the Parliament – between 2014/15 and 2015/16. Unlike the first rule, which is a moving five-year target, there is no putting this one off, and the IFS says that under both of its scenarios, the Government will miss it.
However, it’s worth pointing out that the IFS projections purposefully ignore the £37bn windfall the Government will reap as a consequence of the Bank of England shifting the profits from its quantitative easing programme over to the Treasury. However, some economists believe that the Chancellor could just about meet his second rule thanks in part to this extra money, which will reduce the size of the national debt.
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