Overshoot of Budget projections likely - Ernst & Young - United Kingdom

The government is on course to overshoot its net borrowing projections for the current financial year, but the problem is likely to worsen next year.

Regardless of the new Fiscal Responsibility Bill there is no doubt that fiscal policy will have to be tightened significantly after the election.

In the absence of any further fiscal measures the deficit would be £113 billion in 2013/14, meaning a much tougher adjustment will be required.

"Today’s figures indicate that the government is on course to overshoot its net borrowing projections or the current financial year. So far this year borrowing has on average been £7.6bn higher each month compared with last year. But the problem is likely to worsen next year, when weak tax receipts and high expenditure levels, thanks to continued outlays for social benefits, will push up the deficit. 

"Regardless of the new Fiscal Responsibility Bill - which commits the government to halving the deficit within four years - there is no doubt that fiscal policy will have to be tightened significantly after the election regardless of who forms the next government.

"Policy begins to be tightened in early-2010 with the restoration of VAT to 17.5% and continues with the increase in NICs, introduction of a new 50% rate of income tax and a programme of spending cuts. But the measures announced so far provide a fraction of the extra income needed to close the government deficit and the current Chancellor’s plans are reliant on optimistic growth projections being fulfilled.

"Based on some very optimistic growth forecasts, the Budget 2009 projections show borrowing falling to £97 billion. But using the Budget 2009 expenditure and tax changes and allowing the ITEM model to forecast tax revenues and deficits, we estimate that in the absence of any further fiscal measures the deficit would be £113 billion in 2013/14, meaning a much tougher adjustment will be required.

"While the favoured method across the parties seems to be much greater spending restraint, the sheer size of the deficit means it will be difficult to avoid having to raise taxes as well."