George Kerevan: George Osborne likely to face up to tough challenges

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Despite November’s improved unexpected improvement in consumer confidence, the omens don’t look good for the Chancellor’s autumn statement next week.

According to the Institute for 
Financial Studies (IFS), should the current wayward trend in Treasury borrowing persist for the remainder of the year, it could total £133 billion. That’s £13bn higher than forecast.

This red ink has been caused by an estimated £17bn undershoot in tax receipts due to the soft economy. That leaves George Osborne with very little wiggle room on Wednesday.

In fact, the IFS is predicting that debt, instead of falling, will actually rise as a share of GDP between 2014–15 and 2015–16, by £15bn and £27bn respectively – blowing a large hole in the Chancellor’s plans to put the national books in order.

To get back on track, he will have to do something drastic – raise taxes and invent new spending cuts – or face a French-style downgrading by the credit agencies. Which means we are looking at austerity budgets till 2017 at least.

Osborne, of course, is being bombarded with all sorts of advice from business groups, mostly recommending fiscal easing and a Plan B for growth.

I still believe that political necessity (aka Ukip rising in the polls) will force some sort of U-turn in the run up to the 2015 election. But don’t get your hopes up for this autumn statement.

For a start, the borrowing figures are too bleak.

Second, in his March Budget he defied political logic by cutting income tax for top earners – which suggests he has nerves of steel.

Third, once he has set his mind on a plan, he does not reverse easily. Witness his dogged pursuit of Mark Carney to replace Sir Mervyn King at the Bank of England.

Little sign of fiscal cliff vertigo on Wall Street

I ALSO take the view we will not see any substantive progress on US budget deficit negotiations till the very last minute – i.e. as New Year bells chime. If agreement is not reached by then, the US economy will go over the fiscal cliff as temporary tax cuts dating from the Bush era automatically disappear.

That would leave the average American family paying $2,200 (£1,400) more to Uncle Sam, stalling economic recovery.

This week saw another round of acrimonious “negotiations” between Republicans (“no tax rises!”) and Democrats (“no cuts!”). The US stock market remained positive throughout, staying above the psychologically important 13,000 barrier. Indeed, both the S&P 500 and Nasdaq are up this month, despite the looming fiscal cliff.

Better still, the standard gauge index of market trading volatility (the so-called CBOE VIX index) even fell to 15.15.

That’s well below its usual historic average of 20, implying calm rather than nervousness. Clearly the markets do not think America is going over the edge any time soon.

Investors believe the Republicans will blink first after recent comments that a deal could be brokered with Washington. If they don’t, the 
result will be tax rises anyway, for which 
Congressional Republicans will take the blame.

The markets also think that a re-elected President Barack Obama now has a mandate to put up taxes on the rich, i.e. on families earning over $250,000 (£155,000). Of course, Wall Street has been wrong before.