Austerity continues in the UK despite growth

Britain is still expected to face years of austerity despite official forecasts today showing that the economy will return to its pre-crisis peak during this year.

Austerity continues in the UK despite growth

Britain is still expected to face years of austerity despite official forecasts today showing that the economy will return to its pre-crisis peak during this year.

The warning comes after Chancellor George Osborne admitted that the structural deficit will remain stubbornly high, offsetting improved growth figures from the independent Office for Budget Responsibility (OBR).

Mr Osborne said better expected gross domestic product (GDP) growth for the coming years from the OBR meant output would be £16 billion higher than expected - though for 2017 and 2018 increases have been revised downwards.

The Chancellor also hailed figures suggesting the Government would run smaller annual deficits, meaning borrowing £24 billion lower than previously thought - enough to run the police and criminal justice system for a year.

But the OBR said the improvements were cyclical – that is, a result of the economic cycle which is currently in a growth phase – rather than structural - that is, in the way the Government balances its books through tax and spending.

The Government is still on course to meet its fiscal mandate to balance the structural budget, and is now expected to be in surplus by 1.5% of GDP in the 2018/19 financial year.

This has been revised down slightly from a 1.6% surplus predicted at the time of Mr Osborne’s Autumn Statement in December.

While not a major change to the figures, it does suggest that despite his boasts of better economic growth than any other major economy, as well as real wages finally expected to climb, the Chancellor will have little room to change course on austerity.

Mr Osborne told MPs: “While the underlying structural deficit falls, it falls no faster than was previously forecast, despite higher growth.”

Gross domestic product (GDP) is now expected to increase by 2.7% this year, up from a previous prediction of 2.4%. For 2015 it is expected at 2.3%, up from 2.2%.

Latest GDP figures showed the economy remained 1.3% below the level at which it peaked early in 2008.

But Mr Osborne said: “Later this year, the OBR expects the economy to reach the point where it was, finally larger than before it collapsed six years ago.”

But Jonathan Loynes, chief European economist at Capital Economics, said: “The big picture remains that the fiscal consolidation embarked upon back in 2010 is still less than halfway through.”

John Hawksworth, chief economist at PwC, said: “The headline public finance numbers look better, but there is no real additional room for net giveaways.

“This was reflected in a Budget that made small net cuts to spending to fund small net reductions in tax, but did not change the overall fiscal stance in any material way.”

Growth in 2016 is expected at 2.6%, as previously forecast, but in 2017, the figure has been cut from 2.7% to 2.6%, and for 2018 from 2.7% to 2.5%.

Meanwhile, the borrowing forecast for the current financial year 2013/14 has been shaved from £111 billion in the OBR’s December forecast to £108 billion.

For 2014/15 it has come down to £95 billion from £96 billion, for 2015/16 to £75 billion (from £78 billion), for 2016/17 to £44 billion (from £51 billion), for 2017/18 to £17 billion (from £23 billion).

It is still on course not to reach surplus until 2018/19, but this amount is now expected to be higher at £5 billion (up from £2.2 billion).

An improvement in the housing market – buoyed by the Coalition’s Help to Buy scheme – played a large part in reducing borrowing in the current financial year, in the shape of higher stamp duty costs.

Falling inflation also helped as it resulted in a lower cost of servicing debt interest.

The Government is still expected to miss its target to start seeing public sector net debt falling as a share of GDP by 2015/16, with the OBR predicting that the first drop will not come until the following financial year.

However, debt is expected to peak at 78.7% of GDP, revised down from 80%.

The OBR said while the UK continued to recover, inflation was falling and unemployment falling more quickly than expected, productivity and wage growth remained disappointing.

It said consumer spending, supported by falling savings, had been the biggest driver of growth while latest data showed business investment was recovering. But exports remained disappointing.

The OBR expects the “output gap” to close by mid-2018 – meaning the economy finally returning to normal capacity a decade after the start of the downturn. But this was a year earlier than had been forecast in December.

It said the Budget had little effect on borrowing, with a £5.5 billion cumulative net tax cut offset by a £5.75 billion net reduction in spending.

Meanwhile, the impacts of some of the measures on public sector finances in the long term were positive for the five-year forecast period but uncertain later, hinting at a hangover for the Chancellor’s successors.

Policies including changes on pension and national insurance would increase receipts by £1.2 billion a year on average over the five years, but by just £200 million over the following 15 years – subject to “considerable uncertainty”.

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