George Osborne foreshadowed next Monday’s announcement of new government economic forecasts on Tuesday by saying growth alone would not bring borrowing back into line.
“Getting over a £156bn deficit is not so easy,” the chancellor said, before praising a report from the Fitch rating agency that called for a “more ambitious deficit reduction plan” to help “underpin market confidence”. His House of Commons speech was part of an attempt by the government to soften public opinion towards austerity measures before they are announced in the Budget and the autumn spending review.
Any government would have had to prepare the public for spending cuts in the new parliament because none of the political parties was willing to highlight the implications of Labour’s spending plans in the election campaign.
The important question, to be given an initial answer on Monday, is whether the public finances are significantly worse than the previous government said and whether spending cuts and tax rises will need to be deeper than planned.
The first decision for the new independent Office for Budget Responsibility, which will set government growth forecasts, will be whether it will cut the Budget forecast for 2011 growth from 3.25 per cent towards the consensus 2.1 per cent figure, and subsequent years from 3.5 per cent to the consensus of a little over 2.5 per cent.
Some scaling back of the forecast is likely. But a more sober growth forecast does not translate automatically into a significantly worse outlook for the public finances.
The latest figure for total central government receipts in 2009-10 stands at £476.3bn, compared with £469.1bn forecast in the March Budget and an even lower £456.7bn in the 2009 Budget. Far from giving excessively rosy forecasts, revenue projections made by Alistair Darling, the previous chancellor, were persistently pessimistic from the 2009 Budget onwards.
The likely outcome on Monday is that while the OBR will say growth will be lower, it will also say the starting point for the deficit is better and tax revenues have held up better than expected, leaving the public finance forecasts in a similar position to those presented in the Budget.
Even so, big spending cuts will be needed just to maintain Labour’s deficit reduction programme, and larger ones are required to meet the ambition of faster fiscal consolidation. This knowledge underpinned Tuesday’s report from Fitch, which said if spending cuts alone were to cut the deficit, it would “imply unprecedented real declines in primary spending” – public spending not devoted to servicing debt. Capital Economics came to a similar conclusion on Tuesday, saying spending cuts and tax rises would “feed back into further weakness in the wider economy”.
While Canada is held up by Mr Osborne as an example, much of its success in reducing spending came from rapid economic growth and lower interest payments on debt. If neither is fully available to Britain, the austerity here will feel much worse than it did in Canada in the 1990s.