£40bn UK budget deficit in 2020 if chancellor sticks to spending cuts

By Joe Mellor, Deputy Editor

A City University report has revealed that the Chancellor could be forced to borrow billions of pounds more than predicted by 2020 if he continues with his huge spending cuts.

The Chancellor’s autumn statement will be announced this week and the University study claims the Treasury has drastically underestimated the impact of departmental and welfare cuts on the wider economy. The report singled out the cuts to public sector investment as a major factor in this increased budget deficit.

The worry is that private sector businesses will curtail their investments plans, due to the reduction in public infrastructure spending. This will lead to less productivity and lower gap growth over the next four year period.

It is claimed that this situation would mean that the Government would be forced to report a £40n deficit by 2020 instead of the promised £10bn surplus. If this was the case is would fundamentally undermine the Chancellor’s fiscal charter, which  dictates that the UK can only borrow in time of distress.

The timing of the release of the study, only days before the statement, aims to highlight the problems that might occur from Osborne’s budgetary plans. He plans to achieve a budget surplus by 2020 from a mix of cuts to departmental spending and welfare, and it is hoped, from national insurance and income tax.

However, George may have already ran into trouble, last week the Office for National Statistics reported that he is already off track in 2015-16. There was higher government spending  and lower corporation tax receipts in October and sent borrowing to its highest for that mont since 2009.

Richard Murphy, an academic at City University said:

“The fact that Osborne looks certain to already miss his 2015-16 forecast by some way just makes it clear that neither the Treasury or OBR seem to have learned the error of their ways and continue to impose austerity on the UK for wholly inappropriate reasons as a consequence.”

The Treasury and the Office for Budget Responsibility (OBR), assume that the multiplier for every £1 of public spending cuts is less than 70p for the economy as a whole. But  an IMF study showed it could be as much as £1.70 as private businesses stopped making long-term investment decisions.

Murphy said:

“The very low multiplier the Treasury uses assumes that cuts in government spending will stimulate growth. That’s an assumption, and not a fact.

“It is one the IMF now disagree with. And the result of basing policy on that multiplier is we have more cuts than we need, lower growth in the UK economy as a result, lower earnings for most households and so lower tax revenues – which actually makes balancing the government’s books harder.”

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