A briefing in today's Financial Times (£) shows that the Chancellor faces a black hole of more than £20bn in the UK public finances. Bad news ahead of the UK budget later this month.
The FT has replicated the economic models used by the Office for Budget Responsibility (OBR). This indicates that the government should no longer rely on an economic recovery to eliminate part of the budget deficit. The consequence is an extra year of austerity before the books are balanced, with a further impact on services and jobs.
While the UK has had a short term recovery, indicators of the economy’s capacity for future growth have deteriorated. With unemployment falling quickly, the figures show that companies may have little room to expand production rapidly.
The FT Briefing explains that:
"The black hole stems from the difference between the actual deficit – expected to be close to £111bn in 2013-14 and the cyclically adjusted deficit estimated to be £85bn this financial year. So far politicians have assumed that they only need to look at the lower figure. Changes in the OBR’s cyclically adjusted estimates have already been the primary cause of the government’s extension of austerity policies from the five years planned in 2010 to the nine years currently thought needed."
This warning comes after Martin Wolf, also in the FT, questioned the underlying basis for the economic recovery. He reminded us that the last time the UK tried the credit-expansion route to growth, it ended up in a huge financial crisis. He therefore asked, "Why should it rationally expect a different outcome this time?"
He went on to say, "Indeed, it is astonishing how little this crisis has shaken conventional wisdom. On the contrary, it is widely believed that it is safer to rely on private borrowing than on public borrowing as a source of demand. An expansion of private borrowing to buy ever more expensive houses is deemed good, but an expansion of government borrowing, to build roads or railways, is not. Privately created credit-backed money is thought sound, while government-created money is not. None of this makes much sense."
It will be interesting to see how much the OBR decides to rain on George Osborne's budget party. The current draft of his speech will doubt tell us that austerity economics works and the recovery proves that. What it won't remind us is that it took more than five years to get to an uncertain and possibly unsustainable 'recovery'. Entirely unnecessary pain, born mostly by the weakest members of society. Today's analysis shows that austerity economics is a disaster that keeps on going.