Osborne to miss debt target

Chancellor George Osborne is in danger of missing his self-imposed rule that the ratio of government debt to GDP must fall in 2015-16, economists say.

They expect him to use next Wednesday's Autumn Statement to announce lower forecasts for GDP growth this year and next. Because of this, he'll have to announce extra borrowing. Ruth Lea at Arbuthnot Banking expects him to forecast net borrowing this year of at least £10bn more than the £91.9bn the Office for Budget Responsibility predicted in March. And Chris Crowe at Barclays Capital warns that borrowing forecasts for the years 2013-14 to 2016-17 could also be revised up by more than £40bn in total. Economists at the Institute for Fiscal Studies (IFS) say that Mr Osborne is "on course to miss" his target of reducing the debt-GDP ratio in 2015-16.

Most economists, though, believe he will meet the other part of his "fiscal mandate", to achieve a balance on cyclically-adjusted current borrowing in five years' time. This is because he can claim that most of the extra borrowing is due to weaker than expected growth and so disappears when figures are adjusted for the state of the economy.

But IFS economists believe that tax revenues this year have been even lower than expected given the faltering economy. If this weakness persists, they say the extra borrowing won't be entirely cyclical.

We'll see on Wednesday what Mr Osborne intends to do about this. Mr Crowe believes he might announce even more fiscal tightening for the next few years - perhaps mitigated by pulling forward some public sector investment into the next few months. This, he says, could allow the chancellor to meet his target "by the slimmest of margins".

But many economists would prefer that he quietly drops the target. The IFS says it "has little to commend it" as a fiscal rule. It is silly to expect the debt ratio to fall in a particular year when nobody can foresee what economic conditions will be in that year.

Certainly, the gilt market is untroubled by all this. Yields on long-dated index-linked gilts are still close to zero. This implies that - for now at least - high public borrowing is more of a political problem than an economic one.

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