Chancellor George Osborne will have to abandon his goal for the national debt to finally fall as a percentage of GDP by 2015-16, even if current borrowing bumps are temporary, the Institute of Fiscal Studies (IFS) estimated. However the think-tank said that this target was not macroeconomically relevant anyway – and should be dropped rather than met with extra fiscal consolidation.
If the current jumps in public sector borrowing were permanent, the chancellor would need to hike taxes further or make more cuts in order to meet his other target – balancing the structural current budget by the end of the parliament.
The report also demanded the chancellor didn’t use the recent quantitative easing accounting changes – which see the government borrow less now but are likely to drive extra borrowing in future – to fudge the figures, since as the official budget watchdog has stated, this change will not affect finances in the long-run.
“Since the budget, the outlook for the UK economy has deteriorated and government receipts have disappointed by even more than this year’s weak growth would normally suggest,” said IFS deputy director Carl Emmerson.
“As a result, the chancellor might find himself having to abandon one of his fiscal targets. If much of the additional weakness this year feeds into a permanently higher outlook for borrowing then in order to comply with his other fiscal target Mr. Osborne would need to announce yet more tax rises or spending cuts for the next parliament in next week’s Autumn Statement.”