Jens Larsen at RBC Capital Markets expects the Office for Budget Responsibility to reduce its projections for public sector net borrowing by a total of around £100bn between this year and 2017-18.
This reduction will be mostly due to an upgrading of GDP forecasts. If the OBR moves into line with the Bank of England’s latest thinking, it will revise up its growth forecast from 0.6 to 1.6 per cent for this year and from 1.8 to 2.8 per cent for 2014. Because of this, it will expect more tax revenues. And simply applying the same growth rate in more distant years to this higher level will raise the tax revenues expected in later years, thus reducing the projected deficit.
Despite this good news, economists don’t expect the Chancellor to announce a big net giveaway; they believe freezes in fuel duty and an increase in the personal tax allowance will be mitigated by fiscal tightening elsewhere. “There is no room for fiscal laxity,” says Ruth Lea at Arbuthnot.
One reason for this is that the government’s self-imposed fiscal targets are likely to be only half-hit. Although most economists expect the Chancellor to be able to meet his target of being able to forecast that the cyclically-adjusted current balance will be in surplus in five years’ time, they expect he’ll miss his target of reducing the ratio of government debt to GDP in 2015-16. Most expect this ratio to be around 80 per cent then, compared to under 40 per cent before the crisis began in 2008.
Also, adds Brian Hilliard at Societe Generale, most of the projected reduction in borrowing will be merely cyclical - an artefact of faster growth. Anyone who was worried about a structural deficit - one that wouldn’t fall as the economy improved - a few months ago should still be worried now.
Indeed, many economists fear that the UK’s long-term growth rate is so low that deficits will persist. Figures this week added to these concerns. They show that the 0.8 per cent GDP growth in the third quarter was due mainly to a rise in consumer spending, whilst CBI surveys show that this has slowed down in this quarter with flat retail sales growth in the past two months.
