George Osborne’s strategy was 75% cuts and 25% taxes, but he forgot to add in growth; growth last year cut the deficit as much as cuts.
Yesterday the ONS released new revised figures (pdf) for 2010-11 borrowing, a net borrowing of £136.7 billion. Still an enormous number, but a smaller number than HMT was predicting in March 2010; then the number was £163bn.
The consensus at the time was that recovery from a balance sheet recession would be slow. But as we saw last year, left to recover, the economy can defy the consensus, and growth definitely wasn’t slow.
A year ago, even George Osborne was celebrating that GDP was growing at its fastest rate since 1999. The predictions for borrowing for 2010-11 were also frequently downgraded as each quarter of fast growth continued.
Of course that all stopped in the fourth quarter, and now the chancellor’s having a bout of amnesia about how fast growth can go.
We can now highlight the effect growth can have:
Budget deficit 2009-10
|Darling 2010 budget effects||+ £1.4bn|
|June 2010 emergency budget cuts||– £8bn|
|Effect of VAT rise accrued from Jan 2010||-£2bn|
|Fastest growth since 1999||-£10.8|
Osborne’s strategy was 75% cuts and 25% taxes, but he forgot to add in growth. Growth last year cut the deficit as much as cuts.
At the moment, the OBR is predicting the deficit will be cut only to £121bn:
Budget Deficit 2010-11
|Darling’s budget changes (estimate from March 2010)||-£3.7bn|
|OBR June 2010 estimates of policy changes||-£16bn|
|Stagnation increase to deficit||+£5bn|
|OBR current prediction of the 2010-11 deficit||£122bn|
It is likely that this year the stagnation since Q4 2010 will be a net drag on cutting the deficit. We believe it will be worse than the £4bn here. The OBR noted yesterday receipts still aren’t growing as fast as it likes.
At the same time unemployment rose by 80,000 – if it continues in that direction it could pose a problem. OBR’s fiscal prediction is 8.2% unemployment; it’s already at 7.9%. Both will push the borrowing higher.
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