The hole truth

As evidence of his fiscal rectitude, George Osborne has continually reasserted two pledges. Namely, that he will eliminate the structural deficit (the part of the deficit that remains even after the economy has returned to trend growth) and ensure that Britain's debt-to-GDP ratio is falling before the end of this parliament. But now it appears the first of those targets is in doubt. A Financial Times analysis found the Office for Budget Responsibility (OBR) had overestimated the "output gap" (the difference between actual and potential GDP) and that the economy is capable of less growth than previously thought. As a result, the structural deficit is now £12bn (25 per cent) higher-than-expected.

And here's the rub - since a structural deficit cannot, by definition, be eliminated through economic growth, Osborne will either have to impose further spending cuts and tax rises, or risk breaking his own pledge. For instance, to plug the latest black hole, the Chancellor would need to raise VAT from 20 per cent (already a record high) to 22.5 per cent. Worse for him, the political calculation was that an accelerated pace of deficit reduction would provide room for a pre-election giveaway, including cuts in direct taxation. That hope now looks increasingly distant.


Ministers scrambled to deny the FT's story, with Vince Cable insisting that he did not recognise the figures. But it's worth noting that the OBR head, Robert Chote, has previously warned that "the biggest uncertainty is whether we have the amount of spare capacity in the economy correct".

The OBR, which initially gave the government a 70 per cent chance of meeting its fiscal mandate, will publish updated figures on 29 November. It could yet ruin Osborne's Christmas.

George Eaton is political editor of the New Statesman.

This article first appeared in the 26 September 2011 issue of the New Statesman, The fifty people who matter