UK 'may fail to pay off deficit'

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Chancellor George Osborne may not be able to pay off Britain's deficit by the next election, a think-tank has warned

Chancellor George Osborne risks missing his target of eliminating Britain’s national deficit by the next general election because of below-par growth and “formidable” difficulties delivering cuts, an economic think-tank has warned.

The Institute for Fiscal Studies’ annual Green Budget had good news for the Chancellor in the short term, predicting he will need to borrow £2.9 billion less than expected this year.

But it warned Mr Osborne not to use this cash to fund tax give-aways in his March 23 Budget, but to “bank” the money to help deal with risks further down the line.

The tax breaks advocated by some business groups to help boost growth could prove “ineffective” because they would risk triggering rises in interest rates to rein in inflation, said the IFS.

And the think-tank warned that any fiscal loosening designed to help the economy could undermine investor confidence that the Government will see its cuts strategy through.

Following “disappointing” figures last week – which showed GDP shrinking by 0.5% in the last quarter of 2010 – the report warned that growth over the medium term was likely to be lower than predicted by the Office for Budget Responsibility (OBR), whose forecasts are used by the Chancellor to plan his Budget.

Analysts from Barclays Wealth and Barclays Capital – which prepared the report in collaboration with the IFS – said the economy was likely to grow roughly in line with the OBR’s 2.1% forecast for 2011.

But they warned that in following years, growth was likely to be less than the OBR forecasts, with a projected deficit on the cyclically-adjusted current budget of 0.4% of national income in 2015/16. This would mean that “current policy would not be consistent with the Chancellor’s fiscal mandate” of paying off the deficit by the election, said the report.

Only an “optimistic” view of the future would see the economy developing as the OBR expects and Mr Osborne meeting his targets, said Barclays experts Michael Dicks and Simon Hayes, while a “pessimistic” view would see public sector net debt still rising in 2015/16.

The report said: “The Government should review its spending settlements in a couple of years’ time in light of any changes to the economic and fiscal outlook, or particular difficulties faced by departments in delivering spending cuts that are palatable to the Government and the wider public.”

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