UK faces more years of austerity

Chancellor George Osborne set Britain on course for four more years of austerity today as he pledged not to spend the proceeds of better growth and lower borrowing.

d17a62d2-5daa-11e3-b72d-0a0c0223000020131206T002613
Chancellor of the Exchequer George Osborne has played Scrooge not Santa with his Autumn Statement, an analyst said.

Chancellor George Osborne set Britain on course for four more years of austerity today as he pledged not to spend the proceeds of better growth and lower borrowing.

New forecasts from the Office for Budget Responsibility (OBR) announced in Mr Osborne's Autumn Statement predicted the UK budget deficit would be wound down to produce a surplus in 2018/19 for the first time in 18 years.

However, the OBR's revisions to its borrowing numbers were not quite as positive as had been expected - as a sharp uprating in its economic growth prediction for this year was tempered by a more downbeat medium-term assessment.

Meanwhile the Government is still on course to miss its target for starting to reduce overall debt by 2015/16 though this is now expected to be one year, rather than two years, behind schedule.

The Chancellor resisted the temptation to use any of the expected improvements in Government finances to fund a tax-cutting giveaway - choosing to "play Scrooge rather than Santa" in the words of one City economist.

Instead, he told MPs the Government was seeking a "responsible recovery" and would "go on taking the difficult decisions".

"We will not spend the money from lower borrowing," Mr Osborne insisted.

Economists said a series of spending measures including changes on fuel duty and rail fares would be paid for by cuts elsewhere, making the package fiscally neutral.

The OBR forecast that Government spending on goods and services was expected to reach its lowest level as a proportion of domestic product since records began in 1948.

Peter Spencer, economic advisor to EY Item Club, said: "It is basically a recipe for four more years of austerity."

The OBR lifted its growth forecast for this year to 1.4% (up from 0.6% in March) and to 2.4% for next year (from 1.8%) though growth is expected to be slower in 2015 at 2.2% (from 2.3%), 2016 at 2.6% (from 2.7%) and 2017 at 2.7% (from 2.8%).

Quarterly growth rates which have reached 0.8% this year were not expected to be sustained in 2014, while expansion in 2015 would be lower due to weak exports.

The OBR said that while consumer confidence, credit conditions and the housing market had improved, productivity and real earnings growth (taking into account inflation) remained weak. Business investment and trade also "continued to disappoint".

Looking ahead, it expects private consumption to grow faster than household income as the savings ratio falls, implying that households will raid their nest-eggs to fund spending. Business investment will also recover.

On borrowing, the OBR had been expected to revise down its previous deficit forecast of £120 billion for 2013/14 to £105 billion, but instead offered a rather less rosy figure of £111 billion.

The continuing fall is expected to see a cumulative £73 billion shaved off the figure over the next five years.

But the independent body said the return to surplus - expected at £2.3 billion in 2018/19 - represents a cyclical improvement caused by growth patterns rather than a structural improvement. It would be the first surplus since 2000/01.

Debt as a proportion of GDP is expected to peak at 80% in 2015-16, more than double its pre-crisis level.

Meanwhile, it expects unemployment to drop sharply from the current rate of 7.6% to 7.1% next year and 7% by 2015 - the Bank of England's threshold for considering a rise in interest rates from their historic low of 0.5%.

The OBR now expects house price inflation above 5% in 2014 and 7% in 2015, with prices 10% higher by 2017-18 than it had expected in March.

Jonathan Loynes, chief European economist at Capital Economics, said Mr Osborne's key message was that the fiscal squeeze "still has a long way to go".

He suggested that rather than by easing austerity, the Chancellor placed the burden for sustaining growth on the Bank of England's Monetary Policy Committee (MPC) by keeping interest rates low.

"Of course, the shackles may loosen as the 2015 general election looms closer, particularly if the Government continues to struggle to take credit for the economic recovery.

"For now, though, Mr Osborne has played Scrooge rather than Santa and left the onus squarely on the MPC to keep the economic recovery going."