Don't celebrate just yet, George. Photo: Getty Images
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Today's borrowing figures are good news - but we're not out of the woods yet

Britain will need five more years like this if George Osborne is to have any chance of balancing the books, warns Nida Broughton.

Today’s Government borrowing figures provide an optimistic backdrop to the Chancellor’s Summer Budget on 8 July. The year has got off to a good start. In March, the OBR expected the total amount borrowed in 2015-16 to fall by around 17%. So far, borrowing in the first two months of 2015-16 is around 24% lower than the same time last year.

It is good news – and it will be a relief for the Chancellor.  The SMF’s analysis shows that George Osborne has set himself a difficult task for this Parliament.  What seems like an easy job – saving £1 in every £100 for two years, turns out to be rather more difficult when spending promises and other factors outside the Government’s direct control have to be paid for. Commitments to spend more on the NHS, international aid and schools have been made. Debt interest payments are forecast to continue to rise. With huge chunks of the Government budget protected from cuts, the SMF estimates that the true scale of the challenge could be closer to having to save £12 in every £100.

Achieving those level of cuts will be hard enough – certainly harder than in 2010. With the easiest cuts already made, Government will need to be innovative to save money whilst keeping up the quality of public services. Yet, the ability to actually push through these cuts, though important, will not be as crucial as economic growth in getting the deficit down.

A look at the OBR’s March 2015 forecast shows that rising tax revenues is supposed to do the majority of the hard work in clearing the deficit. Tax revenues are expected to rise by roughly £20 billion- £30 billion every year over the next few years, allowing borrowing – expected by the OBR to be around £75 billion in 2015-16 - to dwindle to zero by 2018-19.

The Chancellor needs four years of steady economic growth to drive up tax revenues. The question is whether the UK economy can deliver that. We do not yet know whether the poor productivity growth we have seen since the crisis is evidence of a “new normal”; or whether we can in fact return to the levels of growth seen pre-crisis. How ephemeral was the growth we saw before the crash, and how much permanent damage has the economy taken because of the crisis?

The public finance forecast hinges on this. The OBR’s forecasts assume that the answer lies somewhere in the middle: that the economy’s potential to grow has taken a hit, but that it will slowly return to its historical average.  The SMF’s analysis shows that if this does not happen, then borrowing would fail to be eliminated by 2018-19, even if all the cuts currently planned are fully implemented.

The borrowing figures provide some good news. Government revenues – mainly from taxes – are 4% higher than this time last year. It’s a good start, but we’re going to need another few more years of same if the public finances are to be repaired.

Nida Broughton is Senior Economist at the Social Market Foundation.

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Cabinet audit: what does the appointment of Liam Fox as International Trade Secretary mean for policy?

The political and policy-based implications of the new Secretary of State for International Trade.

Only Nixon, it is said, could have gone to China. Only a politician with the impeccable Commie-bashing credentials of the 37th President had the political capital necessary to strike a deal with the People’s Republic of China.

Theresa May’s great hope is that only Liam Fox, the newly-installed Secretary of State for International Trade, has the Euro-bashing credentials to break the news to the Brexiteers that a deal between a post-Leave United Kingdom and China might be somewhat harder to negotiate than Vote Leave suggested.

The biggest item on the agenda: striking a deal that allows Britain to stay in the single market. Elsewhere, Fox should use his political capital with the Conservative right to wait longer to sign deals than a Remainer would have to, to avoid the United Kingdom being caught in a series of bad deals. 

Stephen Bush is special correspondent at the New Statesman. He usually writes about politics.