George Osborne faces a reality check later this week as official figures show that Britain’s public finances will fail to meet official targets for the year despite a recovering economy.
Updated forecasts from the independent Office for Budget Responsibility (OBR) are due to be delivered on Wednesday alongside the Chancellor’s Autumn Statement.
Borrowing figures for the year to date suggest he is on course to miss the fall in the annual deficit forecast earlier this year by the OBR.
Experts say it will leave Osborne with little room for manoeuvre in the statement when it comes to any potential giveaways in the run-up to the 2015 general election unless they are balanced out with a squeeze elsewhere.
It comes as the Chancellor yesterday confirmed that he would set out plans for an additional £2 billion a year for frontline NHS services when he delivers his set-piece address.
HSBC economist Liz Martins said: “The backdrop for the Chancellor’s Autumn Statement is a bleaker one than the one which underpinned his upbeat March 2014 Budget.
“Despite spending cuts, rapid job creation and the strongest growth rate in the G7, the public finances have actually worsened compared with last year.”
Paul Johnson, of the Institute for Fiscal Studies, added: “Things haven’t gone as well as hoped since March, not in the sense that the economy has done less well than hoped, but because earnings growth has been relatively poor, other tax receipts have been relatively poor.
“We’ll probably end up with the deficit a bit higher than the OBR was expecting back in March.”
He said that even with the Chancellor’s promised squeeze on welfare benefits, there would have to be major cuts to other public services in the next parliament. OBR figures will be updated at the time of Osborne’s statement and while the deficit target looks on course to be revised down, predictions for overall growth should be improved.
Previous forecasts were for a 2.7 per cent gain in gross domestic product (GDP) for 2014 but the economy appears set to outperform this with latest figures indicating growth running at a year-on-year pace of about 3 per cent. For next year, the OBR’s latest forecast of 2.3 per cent expansion is lower than most predictions.
The pace of quarterly growth seen earlier this year has slowed and there have been warnings over the threat from the global economy, with the eurozone facing stagnation and expansion in China slowing.
Meanwhile latest UK GDP data showed the recovery was being propped up by the strongest increase in consumer spending for four years while business investment and foreign trade figures worsened. It revived concerns about the unbalanced nature of growth.
Howard Archer, chief UK and European economist at forecasting consultancy IHS Global Insight, said that despite the global warnings, the Chancellor would “be able to trumpet current ongoing healthy UK expansion and a still very decent growth outlook”.
l The CBI said today the UK economy was continuing on a “healthy trajectory” with the rate of growth stable in the three months to November.
The lobby group’s latest “growth indicator” – which polled more than 700 businesses – suggests that expectations for growth are not as strong as earlier in the year but remain well above their long-run average.
Rain Newton-Smith, the CBI’s director of economics, said: “Domestic political uncertainty is an issue for businesses but the global backdrop is a greater concern.”
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