Osborne warned against more austerity with challenging economic backdrop

GEORGE Osborne has been warned not to implement further austerity measures in this week's Budget, despite the fact that the Office for Budget Responsibility (OBR) is expected to deliver a gloomy verdict on the public finances.

Chancellor of the Exchequer George Osborne  Photo: Stefan Rousseau/PA Wire
Chancellor of the Exchequer George Osborne Photo: Stefan Rousseau/PA Wire

The EY ITEM Club Budget preview report said that the OBR is likely to revise up its forecast for borrowing in 2015-16 by £4bn to £77.5bn, as a result of lagging tax revenues and a small overspend on investment.

The projected budget surplus in 2019-20 is also set to be reduced from £10.1bn to around £4bn. Weaker nominal GDP growth, lower oil and equities prices and softer earnings growth all point to the OBR having to scale back its expectations for tax revenues, according to EY. However, the EY report said that the bad news will be mitigated by the prospect of lower Government spending due to the impact of lower gilt yields and inflation on debt servicing costs.

Revisions to the historical data and the weak performance around the turn of the year will cause the OBR to revise down its GDP growth forecast for 2016 from 2.4 per cent to 2.2 per cent, the report claimed.

An EY spokesman said: “However, the OBR could go as far as two per cent if they conclude that the recent turbulence in financial markets has taken a toll on corporate and consumer confidence.”

The Chancellor has hinted that he will react to the smaller surplus by making further cuts to Government spending. But the EY ITEM Club warns that this would be a mistake given the challenging economic backdrop.

Martin Beck, senior economic adviser to the EY ITEM Club, said: “The Chancellor has spoken before about fixing the roof while the sun shines. But, with storm clouds gathering over the UK economy, tightening fiscal policy further could worsen an already fragile economic situation. Now is not the time to be fixing the roof.

“The OBR’s fiscal forecast will reduce the Chancellor’s margin for error against his fiscal mandate.”