Spending cuts under fire amid new borrowing forecasts

The Office for Budget Responsibility (OBR) said borrowing would be 155 billion this year - 8 billion lower than in March's Budget - and 23 billion lower over the five years to 2014/15.

The independent forecaster also predicted slower growth of 2.6% in 2011 - prompting fears that deep cuts in Chancellor George Osborne's emergency Budget next week could plunge the UK into a double-dip recession.

TUC general secretary Brendan Barber said: "Deep cuts now appear increasingly unnecessary and dangerous.

"Any attempt to press ahead with austerity plans will look like a political project to remodel Britain rather than an economic necessity."

Shadow Chancellor Alistair Darling said the OBR's forecasts vindicated his stance of supporting the UK's fragile recovery with public spending this year.

He told BBC News: "It does rather underline the point that I have been making that if you take money away from the economy you run the risk that growth will be lower still.

"This Government has no strategy for growth and if you don't get growth you won't get borrowing down."

ING Bank economist James Knightley said the figures showed the coalition "starting from a better base" in its efforts to tackle the deficit, but warned that "significant pain" still lay ahead for the economy.

Under the previous Government's figures, net borrowing over the next five years to 2014/15 was forecast to hit 567 billion, although in the OBR forecasts total borrowing is pencilled in at 544 billion.

The borrowing figures - while still at record levels - are better than feared in March due to recent strength in tax receipts, although the OBR also forecasts lower "trend growth" for the UK going forward.

The OBR predicts the financial crisis "will have a persistent effect on trend growth over the medium term" and expects growth of 2.8% in 2012 and 2013 - below the previous Government's 3.5% forecast.

This means the OBR forecasts show a higher structural deficit - borrowing which is resistant to the economic cycle - over the next five years.

This structural deficit is forecast at 8% of GDP this year and falling to to 2.8% in 2014/15, compared with 7.3% and 2.5% respectively in March's Budget.

The OBR said there were "major uncertainties" over its predictions, including the ability of a fragile banking system to support the recovery with credit as well as the extent to which private sector spending and employment can fill the gap left by public spending cuts.

There are also worries over demand in Europe, a major export market for the UK, due to the current sovereign debt woes affecting nations such as Greece.

Jonathan Loynes, chief UK economist at research consultancy Capital Economics, said the new forecasts took a "surprisingly optimistic" view of the outlook for the UK public finances.

He added: "On the face of it, they might seem to relieve the pressure for an additional fiscal tightening, or even make room for tax cuts. But we suspect that the Government will still want to err on the side of caution, if only for political reasons.

"Note too that we don't yet know what the Government's fiscal mandate will be - it may require a significantly sharper fall in borrowing than the new forecasts imply. As such, we still expect a pretty tough Budget next week."

The forecasts today will be revised next week to take account of the policy measures unveiled on June 22.

Mr Osborne said the forecasts set out by OBR chief Alan Budd "couldn't be clearer".

He said: "The structural deficit - that's the borrowing which doesn't fall even when the economy grows - (is) higher in every year, and that's on what the OBR say are optimistic assumptions.

"Indeed, Alan Budd is explicit on the first page that if we were to switch to Labour's spending plans then interest rates would be higher and economic activity would be lower.

"It's damning evidence that the mess the previous Government left behind is even bigger than we thought."