George Osborne yesterday promised to balance the books by the end of the decade – but was forced to outline painful spending cuts and tax rises to hit his target.
The Chancellor said he would return Britain to the black with a surplus of £10.4billion in 2019-20, a decade after borrowing hit a record high under Labour.
But meeting his pledge to eliminate the deficit in this parliament required him to announce nearly £14billion of spending cuts and tax rises for that year alone – many on big business.
Experts said Mr Osborne had ‘back-loaded the fiscal pain’ in order to reach his target.
George Osborne (left) yesterday promised to balance the books by the end of the decade
The Chancellor was forced to take action after a deterioration in the economy blew a £56.3billion black hole in his Budget plans. That was around double the £27billion windfall the Chancellor was handed – and spent – in November’s Autumn Statement after an improvement in the forecasts.
He also conceded that he will not hit his ‘supplementary’ fiscal target of the national debt falling as a percentage of national income this year.
Instead, the debt burden will again rise, from 83.3 per cent of gross domestic product in 2014-15 to 83.7 per cent in 2015-16 before slowly edging down. Mr Osborne said Britain ‘is not immune to slowdowns and shocks’ around the world.
Warning that ‘storm clouds are gathering again’ over the global economy, he added: ‘Financial markets are turbulent, productivity growth across the West is too low, and the outlook for the global economy is weak.
‘It makes for a dangerous cocktail of risks – but one that Britain is well prepared to handle, if we act now so we don’t pay later.’
The Office for Budget Responsibility downgraded its UK growth forecasts for the next five years.
As recently as November, it was expecting the economy to expand by 2.4 per cent this year and 2.5 per cent next year. But it yesterday reduced those forecasts to 2 per cent and 2.2 per cent respectively, and made similar cuts to its projections for the following three years.
Meeting his pledge to eliminate the deficit in this parliament required Osborne (pictured) to announce nearly £14billion of spending cuts and tax rises for that year alone
Mr Osborne insisted that Britain was still on course to ‘grow faster than any other major advanced economy in the world’ this year – including the US and Germany.
But the OBR declared that the deterioration in the UK economy meant the Chancellor would be £56.3billion worse off over the next five years than has been expected in November.
The black hole came as a huge shortfall in tax receipts – due to the economy being smaller and growth weaker – more than offset a £24.2billion windfall from lower-than-expected interest payments on the national debt.
The OBR warned that without action there would be a deficit of £3.2billion in 2019-20 – rather than the surplus of £10.1billion pencilled in at the time of the Autumn Statement. That put Mr Osborne on course to break his self-imposed rule of running a surplus.
But the Chancellor used yesterday’s Budget to outline £7.6billion of spending cuts for 2019-20 – including £3.5billion of reductions for Whitehall departments as well as a fresh squeeze on infrastructure investment and changes to public sector pensions.
He unveiled £6.3billion of tax rises, with the bulk of this coming from changes to the timing of corporation tax payments for big business.
The drastic action was required to turn a deficit of £21.4billion in 2018-19 into a surplus of £10.4billion the following year.
But OBR chairman Robert Chote warned that even with all these changes the ‘probability of meeting the surplus target in 2019-20 [is] only slightly above 50 per cent’.
Despite the deteriorating outlook, borrowing this year will be £1.3billion lower than expected, at £72.2billion. However, in the following three years the Chancellor will borrow £36.3billion more than the OBR pencilled in at the Autumn Statement.
Ian Stewart, chief economist at Deloitte, said: ‘The economic backdrop to the Budget has turned out to be even tougher than envisioned. A tougher global backdrop and weaker UK growth have knocked the deficit reduction programme off course.’
He said Mr Osborne has ‘back-loaded the fiscal pain’ to reach a surplus in 2019-20 ‘without squeezing the economy harder now’.
Mr Stewart added: ‘Mr Osborne is hoping that, in the run up to the next General Election, the UK will be better placed to cope with the squeeze needed to wipe out the deficit. Hitting the Government’s most important and most cherished fiscal target will need hard slog and luck.’