The higher borrowing reflects the fact that the economy will grow by less than the Office for Budget Responsibility (OBR) expected in March. The OBR now thinks real GDP in 2016 will be 4.8 per cent lower than it expected in March. Thanks to this, tax revenues are expected to be £21bn lower in 2015-16 than expected in the Budget just nine months ago.
However, George Osborne decided to respond to this not by tightening policy further, but by abandoning his debt reduction target - which most economists thought unjustifiable anyway. "We should let the automatic stabilisers work," he said.
Instead, the policy measures he announced in the statement were, net, very small. They imply a fiscal tightening of an extra £4bn this year - although £3.5bn of that comes from the sale of 4G spectrum - and a net loosening of £900m in 2013-14 and 2014-15, which is less than 0.1 per cent of GDP. Increased personal tax allowances, capital allowances and the abolition of the planned rise in fuel duty will be offset by uprating benefits by less than inflation and by pulling in £3.1bn of tax next year from Swiss bank accounts.
Market reaction to the statement was muted; long gilt futures prices barely changed. One reason for this was simply that the chancellor's announcement was widely expected, and leaked. Another reason, though, is that the additional debt might be bought by the Bank of England rather than private investors as the Bank responds to continued weakness in the economy - the OBR foresees unemployment rising by 200,000 next year - by printing more money. "We would not be surprised to see another expansion of the asset purchase programme," said Christopher Vecchio at DailyFX.
Despite the rising debt, economists doubt that the UK will lose its AAA credit rating. This is partly because the extra borrowing can plausibly be blamed on weakness in the euro area economy, and partly because further austerity measures might further depress the economy, thus tending to add to debt. James Knightley at ING Bank said: "We suspect that the ratings agencies will give the chancellor the benefit of the doubt."
