07 October 2012

FT: UK austerity squeeze set to run until 2018

George Osborne is set to be told this autumn by the Office for Budget Responsibility (OBR) he will have to plug another large hole in the public finances, extending austerity until 2018 and throwing the coalition's deficit reduction strategy into doubt.

Higher borrowing in the years ahead make it probable the OBR will say that the government is likely to miss its supplementary target to see the burden of public debt falling by 2015-16 and if weakness in the growth of the economy continues, the target will also be under threat the following year in 2016-17.

Increased public borrowing this financial year alongside little widening in the estimated amount of spare capacity will prevent the OBR forecasting a period of rapid catch-up growth to cut the deficit without further spending cuts or tax increases.

The scale of the structural problem is close to £15 billion a year, indicating that austerity will have to last until 2017-18, three years longer than Mr Osborne suggested in his emergency Budget in 2010. It will mean that the total squeeze on households from tax increases and the public sector will last eight years.

The coalition is most likely to repeat its policy last year and delay the bulk of new spending cuts and tax rises until well after the next election. Repairing a new £15 billion hole immediately would require the equivalent of a 3p in the pound increase in VAT to 23 per cent.

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