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OPINION

Government debt continues to rise

Government debt continues to rise
March 20, 2013
Government debt continues to rise

This increased debt partly reflects the OBR's expectation that the government will no longer be able to sell gilts at a premium after 2014. Most of it, though, is due to higher borrowing. The OBR now expects cumulative net borrowing of £434bn between 2013-14 and 2017-18 - £55bn more than it expected as recently as December.

This extra red ink is not because of George Osborne's Budget measures, which were, as he said, "fiscally neutral". Instead, it is because the OBR now expects the economy to be weaker than it did in December. Then it expected real GDP growth of 11.5 per cent between 2012 and 2017. It now expects an expansion of 10.6 per cent.

Despite Mr Osborne's emphasis on weak growth in the euro area, only half this downgrade is due to weaker net exports. The OBR also cut its forecasts for consumer spending growth, from 10 per cent to 8.9 per cent between 2012 and 2017, and for business investment growth from 50.7 per cent to 38.4 per cent.

With the economy is set to remain weak, higher debt in itself need not greatly increase gilt yields, simply because a weak economy will maintain strong demand for relatively safe-haven assets.

The chancellor disappointed those economists who had hoped he would encourage the Bank of England to stimulate growth by changing its remit. He merely re-emphasized the 2 per cent inflation target, and allowed the Bank to consider "unconventional policy instruments" (such as buying corporate bonds) or guidance about the future path of interest rates. But David Blanchflower, a former member of the Monetary Policy Committee, said the Bank already had the power to do this, and so it "doesn't make any significant change".

Although sterling rose a little during the Budget, in relief that Mr Osborne did not give the Bank the scope to run a significantly looser monetary policy, some economists warned that it would remain under pressure because of the prolonged weakness of the economy. "It is difficult to see this Budget transforming the growth prospects for the UK," said James Knightley at ING Bank.