Office for Budget Responsibility says borrowing will rise £2.2bn this year after George Osborne promises year-on-year cuts
The Treasury's independent forecaster has warned that government borrowing will rise this year, reversing two years of falls and wrecking previous claims by George Osborne that his austerity measures will bring year-on-year cuts in the UK's annual deficit.
The Office for Budget Responsibility (OBR) said the annual deficit would rise from £121bn last year to £123.2bn in 2013 before falling in subsequent years.
Labour said the admission revealed that austerity was failing in its main task of bringing down debts. The shadow chancellor, Ed Balls, said the government should move quickly to boost growth or risk debts remaining high for the rest of the parliament.
Almost a year on from the double-dip recession, growth remains desperately slow. According to the OBR, gross domestic product (GDP) will rise by 0.6% this year – just half the 1.2% growth rate it expected only three months ago, at the time of the autumn statement. It predicted that GDP would edge 1.8% higher in 2014 before taking off in 2015, when it is forecast to grow 2.8%.
The UK could narrowly avoid sliding into a triple-dip recession this quarter, it said, if the economy managed to eke out an expected 0.1% growth in the first quarter, although the OBR said there was still a 50% chance the economy would contract in the first three months of the year. That follows a 0.3% decline in the last quarter of 2012 and would mean the UK had fallen into its third recession in four years.
The OBR blamed the lack of growth on headwinds from the eurozone. A fall in exports, particularly from the traditionally strong financial services industry, has hit company profits and depressed tax payments to the exchequer.
Osborne said the deficit was falling consistently as a proportion of national income and was now a third lower than Labour's last year in office.
In 2010, he predicted the deficit would be all but eliminated by 2015. Last year, the OBR said it would take a year longer. Its current projections show it will not fall below 3% before 2017-18, adding more than £50bn to government debt over the next five years and taking the total gross debt to more than 100% of GDP by 2016.
Eurozone countries are also under pressure to bring their annual deficits below 3% and, despite their current difficulties, Spain expects to achieve the target by 2014 along with France, while Germany plans to run a surplus next year.
Osborne said: "The deficit continues to come down. We have taken many tough decisions to bring that deficit down – and we will continue to do so."
The deficit has fallen from 11.2% of GDP in 2009-10 to a forecast of 7.4% this year. The OBR said it would fall to 6.8% next year, 5.9% in 2014-15, 5% in 2015-16, 3.4% in 2016-17 before reaching 2.2% by 2017-18. Much of the cut in the deficit over the next five years is based on a surge in receipts from income tax, which the OBR predicts will rise by a third from the current £150bn to almost £200bn by 2017-18.
Capital gains tax and stamp duty land tax, which tend to rise in line with a strong property market, are expected to almost double over the same period.
Tristan Cooper, of Fidelity Worldwide Investment, said the UK's gross government debt would probably exceed that of France this year and was climbing at a more rapid pace than most other advanced economies.
He said the slowing pace of deficit reduction since last year's budget was striking, with gross debt now expected to peak above 100% of GDP. "This shows what a tough challenge Osborne faces in his bid to get the UK public finances back into shape," said Cooper.
Balls warned that Osborne could be planning a raid on pensions along with other previously untouched areas in order to bring down the deficit after the next general election.
He issued the warning after a Treasury source said the chancellor would promise in his June spending review to target "annually managed expenditure" (AME) in the next parliament, which accounts for about 50% of government spending.
It covers many areas of welfare, debt interest and EU contributions – and has largely been unaffected by the current round of spending cuts. The chancellor has instead focused the cuts on the other area of government spending, departmental expenditure limits (DEL), which cover the day-to-day running of Whitehall.
Balls said 70% of structural AME spending went on pensions. "I don't think that targeting pensioners is very fair or very smart," he said.
He said the chancellor targeted AME spending when some members of the government criticised "shirkers" at the time of the autumn statement last year. "He thought on the autumn statement day: how clever to have a big debate about strivers and shirkers which was – let me target structural AME spend and so he went after it on the 1% cap [when benefits were uprated by just 1%]," Balls said.
"It has been a disaster for him. The welfare AME spending is up because unemployment is up. If you really want to make a difference, you have got to get unemployment down."
A Treasury source said the chancellor would outline a "forward-looking limit on AME spending" in his spending review on 26 June that is due to cover 2015-16.
The source denied that capping AME spending would hit the state pension. "It certainly does not affect our commitment to the 'triple lock'," the source said, referring to the chancellor's pledge that the state pension will rise by the highest of either average UK earnings, CPI inflation or 2.5%.
Analysts said the annual deficit figures may improve when the final calculation is made after the end of the financial year in April. In the last set of figures before the budget, the Office for National Statistics appeared to show an improvement following a net surplus in January of £11.4bn.
However, that was the result of bumper income tax receipts and one-off factors, which included assets from the Royal Mail pension fund and interest payments from the Bank of England. The ONS said that once these special factors were excluded, the budget deficit for the first 10 months of the 2012-13 financial year was 6.6% higher than in the same period of 2011-12.
The chancellor surprised many analysts when he resisted the inclusion of special factors in his debt total, as they would have sliced the deficit by more than £40bn. However, the OBR found that using this measure caused a debt bubble in 2014, a year before the next general election.