Economic background

In March, George Osborne presented his Budget against a background of an economy that was recovering strongly. Nine months on, the Office for Budget Responsibility (OBR) has further increased its forecasts for growth in 2014 (to 3%) and 2015 (to 2.4%). However, from 2016 onwards the OBR’s growth forecasts have been cut, reflecting expectations of weak UK productivity growth, a subdued global trade environment and scheduled real terms cuts in government expenditure.

The recent uplift in economic growth has not been accompanied by any short term improvement in the government’s financial position, largely because of disappointing income tax revenues. The OBR now expects government borrowing for 2014/15 to be £91.3 billion, £4.9 billion over its previous target. For the coming year, borrowing is also projected to be well above the OBR’s March Budget forecast – £75.9 billion rather than £68.3 billion. Thereafter matters start to improve with the deficit turning into a small surplus by 2018/19 – virtually the same as projected back in March.

The similar final result hides major changes in both government receipts and expenditure. By 2018/19 the OBR expects receipts to be £25.3 billion below its March forecast. However, this is offset by significant cuts in expenditure and lower interest costs on government debt, thanks to continued low interest rates.

With debt at such high levels, it is perhaps surprising that the measures announced in the Autumn Statement will add £1 billion to borrowing in 2015/16. Three quarters of that increase is due to the revised stamp duty land tax structure.