The chancellor has no option other than to push out the deadline to hit his fiscal deficit targets, as there simply isn’t enough growth in the economy. In the past few weeks, growth forecasts have been slashed. If he had stuck to his original dates, it would have meant austerity on a scale that would cripple the economy. What we saw yesterday comes as little surprise, and is almost an admission that in 2013 we are likely to lose our prized triple A credit rating. We have already seen yields on Britain’s ten year government bond rise since the summer, as investors have started to factor this possibility in. But such a downgrade isn’t necessarily going to mean a sudden and prolonged spike in borrowing costs. You only have to look at the likes of France and the US, which have already lost their triple A credit ratings, to see that borrowing costs will not rises significantly.
Angus Campbell is head of market analysis at Capital Spreads.
George Osborne is taking a reckless gamble by extending his fiscal targets out to 2017-18. Government borrowing will now remain at elevated levels for a prolonged period. The deficit reduction plan could easily be derailed by lower-than-forecast growth. Osborne is relying on robust growth in the medium term to boost tax revenues and enable him to meet his targets. But this cannot be guaranteed. Recent history shows that Office for Budgetary Responsibility forecasts are unreliable. Borrowing in 2013-14 is likely to be almost double the figure originally expected. If stronger growth fails to materialise, the UK could quickly lose the confidence of the bond markets and face a debt spiral. Given the risks, it would have been wiser to take a more conservative approach. Deeper cuts would have made Britain more resilient to future growth shocks.
Dr Richard Wellings is deputy editorial director at the Institute of Economic Affairs.