Slow economic growth prompts preparations for delaying deficit reduction target until after 2015 general election
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George Osborne is preparing for the possibility that his deficit reduction plans will be delayed by a year after slow economic growth. Photograph: Andrew Winning/Reuters
Super sleuths in Westminster and Whitehall have been involved in a lengthy search over the past year for a Plan B for the economy.
Taking their lead from the outgoing cabinet secretary Sir Gus O'Donnell, who called last year for the preparation of contingency plans, the sleuths believe there is bound to be a Plan B hidden in the depths of the Treasury.
The truth is a little more prosaic. There is only one plan – the Plan A outlined by George Osborne in his emergency budget in June 2010, a month after the general election. But Plan A has more flexibility built into it than has been appreciated.
The chancellor is expected to rely on this flexibility in his autumn statement later this month when he responds to another downgrade in its growth forecast by the Office for Budget Responsibility. This follows the announcement on Wednesday by the Bank of England that it has revised its forecast for growth for next year to below 1% for the first half of the year.
One senior Whitehall source has told me – as I report in Thursday's Guardian with my colleague Patrick Wintour – that the OBR may say that some of the slow economic growth Britain has experienced over the past year is structural, adding to Britain's record structural fiscal deficit. This means that the chancellor's target of eliminating the structural deficit by the time of the general election in 2015 may have to be delayed by a year.
Robert Chote, the OBR chairman, is expected to say that the recession was caused by such a grave financial crisis that it will take the British economy much longer to recover and that the slow rate of recovery is now structural. This means that the gap between tax receipts and public spending is wider and more permanent than expected, forcing up borrowing and adding to the structural deficit. This is the part of the deficit which is immune to economic growth and can only be tackled through spending cuts and tax increases.
Whitehall sources are suggesting that the structural deficit could have increased by £12bn. This is the figure first revealed by Chris Giles, the economics editor of the FT, in September. This is what Giles wrote on 19 September:
The Financial Times has replicated the model of government borrowing used by the independent Office for Budget Responsibility, which suggests the structural deficit in 2011-12 is now £12bn higher than thought, a rise of 25 per cent.
By repeating and extending the fundamental elements of the OBR methodology, it is clear that even if there is no slippage in borrowing from previous forecasts, the level of spare capacity in the economy is lower than expected, so the OBR will not be able to forecast as much catch-up growth as it did in March.
More of the deficit appears permanent and will not be eliminated by a bounce back in the economy.
One Whitehall source told me:
The OBR will make a growth forecast. But it will also make an assessment about whether the slow growth we have at the moment is structural. In other words, is a recovery from a financial crisis unlike any other and you suffer slow growth for some time?
At the moment the automatic fiscal stabilisers kick in and borrowing goes up on a cyclical basis. But if the OBR decides this slow growth is structural then the structural deficit grows. That is how Chris Giles [economics editor of the FT] came up with his £12bn. But it only delays us to 2015-16.
That means that Osborne will still meet his fiscal mandate outlined in his emergency budget of June 2010. This has two elements. These are to ensure:
• The structural current deficit is in balance by 2015-16. This translates as eliminating the structural deficit.
• Debt is falling as a share of GDP by 2015-16.
But Osborne's hopes of meeting these goals by the time of the next general election may have to be revised. While the formal fiscal mandate still stands, the chancellor may have to revise these words:
I can confirm that, on the basis of the measures to be announced in this budget, the judgement of the Office for Budget Responsibility published today, is that we are on track to meet these goals.
Indeed, I can tell the House that because we have taken a cautious approach, we are set to meet them one year earlier – in 2014-15.
Or to put it another way, we are on track to have debt falling and a balanced structural current budget by the end of this Parliament.
One senior Conservative told me:
So George burns up a year thanks to slow growth. But his fiscal mandate still stands.