George Osborne will not balance books by end of decade

George Osborne will fail to balance the books by the end of the decade as weaker tax receipts leave Britain facing another round of austerity, a think tank has warned.

The Telegraph reports that the National Institute of Economic and Social Research (Niesr) also said a looming June referendum on Britain’s membership of the European Union meant it would be “implausible” for the Bank of England to raise interest rates before a summer vote.

Simon Kirby, principle research fellow at Niesr, said it was a “coin toss” as to whether the Chancellor would eliminate the deficit by the end of the decade, with weaker nominal growth expected to weigh on tax receipts.

Slightly faster interest rate rises beginning in the second half of this year are also expected to push up debt interest payments at a quicker pace than implied by markets, which are operating under the impression rate rises will be delayed until the second half of 2017.

The Office for Budget Responsibility (OBR), the Government’s fiscal watchdog, has forecast a budget surplus of £10.1bn in 2019-20, helped by lower interest rates as well as changes to the way it measures VAT and National Insurance receipts, which it used to relax its austerity drive.

However, Niesr – which did not adjust its models – said Britain was on course to post a deficit of around £600m by the end of the decade.

While Mr Kirby described this as “modest” compared with the projected £2.2 trillion size of the UK economy in 2020, he said it highlighted how inflexible the Chancellor’s fiscal mandate was.

“If the OBR were to present this forecast in the March Budget, the Chancellor could either ignore its forecast, or have to introduce a policy change in order to show that he is expected to achieve an absolute surplus,” he said.

“A £600m fiscal tightening over a four-year period is relatively small. However, the inflexibility of the current fiscal mandate clearly shows that the Chancellor is faced with the option of choosing to ignore his own fiscal council or tightening policy when he would not want to.”

The OBR said in November that the Government had just a 55pc chance of achieving its goal of a balanced budget.

Concerns about global growth and a renewed fall in oil prices prompted Niesr to push back its forecast for an interest rate rise to the second half of 2016, from a previous forecast of this month.

Mr Kirby said the outcome of Prime Minister David Cameron’s negotiations with Brussels suggested Britain was likely to hold an EU referendum this summer. He said Bank of England policymakers were unlikely to vote for tighter policy immediately ahead of the plebiscite.

“I think it’s somewhat implausible that they would increase interest rates before [the referendum because] there’s potentially a vote for exit, and … the very fact of having a two year period of negotiation with our European partners if there was an exit would undoubtedly introduce a significant amount of uncertainty,” he said.

NIESR said low oil prices and subdued price growth around the world meant inflation, as measured by the consumer prices index (CPI), would average just 0.3pc this year, from a previous forecast of 1.1pc. Inflation in 2017 is expected to bounce back to 1.3pc, although this is well below the 1.8pc it forecast in November.

However, NIESR expects falling fuel costs to provide a “significant” boost to household spending power this year, lifting growth by 0.4 percentage points in 2016. The UK economy is expected to expand by 2.3pc this year and 2.7pc in 2017.

Separate data published by the British Retail Consortium showed shop prices fell 1.8pc in the year to January, following a fall of 2pc in December. This marked the 33rd month of falling shop prices.
Helen Dickinson, chief executive of the BRC, said intense competition among retailers was continuing to drive down prices on the high street.

“This is in line with what we have seen over the last 12 months,” she said.

The data showed food prices increased by 0.1pc in January, following a fall of 0.3pc in December, marking the first rise since August 2015. “We will have to wait for next month’s figures to see whether this is a one-off blip or whether after a sustained period of price falls food prices are beginning to stabilise,” said Ms Dickinson.