Osborne may not be able to clear national debt, think-tank warns

BELOW-par growth has put the coalition's efforts at eliminating the national debt at risk, an influential think-tank has warned Chancellor George Osborne.

The criticism by the Institute for Fiscal Studies (IFS) ahead of next month's Budget warns that Mr Osborne will have little room for manoeuvre with the country on the edge of a double-dip recession.

It comes after it was revealed last week that the UK economy shrank by 0.5 per cent in the last three months of 2010. Most analysts believe it will shrink again in the first quarter of 2011 because of rises in VAT to 20 per cent and fuel duty.

If that happens, Britain will technically be in recession and the IFS warned that with negative or stagnant growth, the government would struggle to cut the 155 billion deficit, even with 81bn of cuts over the next four years.

The IFS's annual Green Budget had some good news for the Chancellor in the short term, predicting he will need to borrow 2.9bn less than expected this year. But it warned Mr Osborne not to use this cash to fund tax give-aways in his 23 March Budget, but to "bank" the money to help deal with risks further down the line.

The tax breaks advocated by some business groups to help boost growth could prove "ineffective" because they would risk triggering rises in interest rates to rein in inflation, said the IFS.

And the think-tank warned that any fiscal loosening designed to help the economy could undermine investor confidence that the government will see its cuts strategy through.

Analysts from Barclays Wealth and Barclays Capital - which prepared the report with the IFS - said the economy was likely to grow roughly in line with the Office for Budget Responsibility's 2.1 per cent forecast for 2011.

They warned that in following years, growth was likely to be less than the OBR forecasts, with a projected deficit on the cyclically-adjusted current budget of 0.4 per cent of national income in 2015-16.

This would mean that "current policy would not be consistent with the Chancellor's fiscal mandate" of paying off the deficit by the election, said the report.

Only an "optimistic" view of the future would see the economy developing as the OBR expects and Mr Osborne meeting his targets, said the Barclays experts Michael Dicks and Simon Hayes, while a "pessimistic" view would see public sector net debt still rising in 2015-16.

Meanwhile, the report warned the government's package of 81bn cuts in public spending could be "formidably hard to deliver". The cuts are "more ambitious" than those imposed by John Major's administration in the early 1990s and will be more difficult to achieve, said the IFS.

A Treasury spokesman said: "The government is determined to deal with the deficit, as a foundation for confidence and growth in the economy.Not doing so would risk a return to the financial danger zone."