David Cameron and his senior ministers have admitted for the first time that there is a danger they will not be able to tackle borrowing on time.The warning comes as the global economy stands on the brink of a “chronic” debt-driven recession.
The Prime Minister on Monday conceded that tackling Britain’s debts was “proving harder than anyone envisaged”, raising the prospect that the Coalition would be unable to close the deficit by 2014-15.That would rule out any significant tax cuts before the next election. It also raises questions about the Coalition’s fundamental purpose.Departing from the deficit-reduction timetable could raise fears that Britain will face rising borrowing costs as bond markets take fright
.Debt is “a drag on growth”, Mr Cameron told business leaders. “We are well behind where we need to be,” he said. Kenneth Clarke, the Justice Secretary, has warned that the global economy is “in a devil of a mess”, which is “bound to have an effect” on the Coalition’s plans to clear most of the deficit before the next election.
The candid remarks pave the way for George Osborne, the Chancellor, to admit next week that his target will be missed and the structural deficit will not be erased until at least 2015-16.In his autumn statement next week, Mr Osborne will cut his forecasts for economic growth this year and next, blaming the eurozone crisis and the darkening global outlook.In the latest escalation of the global economic crisis, shares tumbled on Monday as market fears spread from the eurozone to America’s $15 trillion (£9.6 trillion) government debt.The FTSE 100 index fell nearly 3 per cent. Other exchanges recorded even bigger falls as investors became worried that Western economies would be dragged back into recession by the weight of their debts.
Almost every Western government is struggling with its debts.In Washington, a cross-party committee supposed to devise plans to curb the government’s debt was close to collapsing.Adding to the markets’ fears, Wang Qishan, the Chinese vice-premier, said global economic conditions remained “grim”. He warned of a prolonged downturn. “The one thing that we can be certain of, among all the uncertainties, is that the global economic recession caused by the international financial crisis will be chronic,” Mr Wang said.Slower growth means the Government receives less money in tax and has to spend more on items such as social security.
That makes it harder to close the deficit, the gap between what the Government raises and what it spends. Official figures due on Tuesday are expected to show the Government is roughly on track to hit its target of borrowing £122 billion in the current financial year. But with growth now expected to be much weaker than forecast, borrowing targets for future years are in doubt.Mr Cameron told the Confederation of British Industry that the Coalition was struggling with public finances.“Getting debt under control is proving harder than anyone envisaged,” he said. “High levels of public and private debt are proving to be a drag on growth, which in turn makes it more difficult to deal with those debts.”
Mr Cameron insisted that he would not deviate from the plan to cut spending, insisting that slowing growth “undermines further the case for adding to the national burden of debt with even more borrowing”.To reassure financial markets about the Coalition’s determination to balance the budget, Mr Osborne could next week signal plans for new cuts after the current spending round ends in 2015.The Chancellor may also argue that he has not broken his own fiscal rules.Mr Osborne last year set himself a “fiscal mandate” to eliminate the structural deficit — the part that does not vary with economic growth — by 2014-15. He gave himself considerable flexibility within that goal.
First, he said the deficit only needed to be cleared by 2015-16, but he had voluntarily chosen a target a year earlier.Second, he said the goal was based on a five-year “rolling” target, meaning that he only has to show that the deficit will be cleared five years from now.Despite that flexibility, Mr Osborne has less room for manoeuvre on the second part of his “mandate”. He has promised total government debts will be falling as a share of GDP by 2015-16. Official figures due on Tuesday are expected to show the Government is roughly on track to hit its target of borrowing £122 billion in the current financial year. But with growth now expected to be much weaker than forecast, borrowing targets for future years are in doubt.
Mr Cameron told the Confederation of British Industry that the Coalition was struggling with public finances.“Getting debt under control is proving harder than anyone envisaged,” he said. “High levels of public and private debt are proving to be a drag on growth, which in turn makes it more difficult to deal with those debts.”Mr Cameron insisted that he would not deviate from the plan to cut spending, insisting that slowing growth “undermines further the case for adding to the national burden of debt with even more borrowing”.To reassure financial markets about the Coalition’s determination to balance the budget, Mr Osborne could next week signal plans for new cuts after the current spending round ends in 2015.
The Chancellor may also argue that he has not broken his own fiscal rules.Mr Osborne last year set himself a “fiscal mandate” to eliminate the structural deficit — the part that does not vary with economic growth — by 2014-15. He gave himself considerable flexibility within that goal.First, he said the deficit only needed to be cleared by 2015-16, but he had voluntarily chosen a target a year earlier.Second, he said the goal was based on a five-year “rolling” target, meaning that he only has to show that the deficit will be cleared five years from now.
Despite that flexibility, Mr Osborne has less room for manoeuvre on the second part of his “mandate”. He has promised total government debts will be falling as a share of GDP by 2015-16. Missing that goal would be a serious political blow to the Coalition.The assessment of progress on the deficit target is made by the independent Office for Budget Responsibility.Ministers are now resigned to the office telling Parliament that the structural deficit will not be closed in 2014-15 and possibly not in 2015-16 either.Some City analysts predict that the Chancellor will not eliminate the structural budget deficit until 2017-18.
Independent economists expect the office to cut its growth forecast for this year from 1.7 per cent to about 1 per cent. Next year’s forecast is likely to fall from 2.5 per cent to about 1.2 per cent.Mr Clarke, a former Chancellor, became the first minister to admit that Mr Osborne could miss the 2014-15 target.“You can’t ignore the fact that we are trying to get ourselves out of trouble in the middle of a global economy that is still in a devil of a mess,” he said. “That is bound to have an effect on what actually happens.”
Asked if Mr Osborne would miss his target, Mr Clarke said it was possible.“I don’t know if he’s going to have to do that, but if he did it would be because of events quite outside our control,” he said.His gloomy tone was echoed by Mohamed el-Erian, head of PIMCO, the world’s biggest bond investment fund.“The sense of uncertainty prevailing in the West is palpable, and rightly so,” he said. “People are worried about their futures. Unfortunately, things will become more unsettling in the months ahead. – Yahoonews
