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14 June 2010

The case for “savage cuts” remains unconvincing

With borrowing lower than expected, the case for dramatic cuts has not been made.

By George Eaton

So, will Alistair Darling get his apology from David Cameron? On the deficit, he has a good case. According to the Office for Budget Responsibility (OBR), borrowing this year will now be £155bn.

That’s £12bn less than the £167bn predicted at the last Labour Budget and a whole £23bn less than the original forecast of £178bn.

Thus, on this measure, there is no evidence for Cameron’s misleading claim that the public finances are “even worse” than we thought. Darling, to his own credit, has publicly highlighted as much:

David Cameron said last week that the borrowing figures were worse than they thought; it’s turned out that that was simply not true . . . Borrowing is less than I forecast, so that excuse for putting up VAT simply doesn’t exist.

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But, the Prime Minister will reply, the structural deficit has risen to 8 per cent of GDP, while growth next year has been downgraded from 3.25 per cent to 2.6 per cent.

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Yet while the OBR figures confirm that growth will be less robust than Darling suggested, they do not support demands for drastic cuts in public spending.

The BBC’s economics editor, Paul Mason, has received confirmation from the OBR chairman, Sir Alan Budd, that Darling’s 2010 Budget would have “eliminated the bulk of the structural deficit by 2015” — the test continually set by George Osborne.

Mason adds:

There is only a 0.3 per cent of GDP difference (maybe 5bn) between Darling’s structural deficit forecast and Budd’s. This means there is no prima-facie ammo in the Budd Report for a significant tightening in order to eliminate “the bulk of the structural deficit”.

In response, we can expect the Conservatives (as they already are doing) to suggest that Budd’s forecasts are overoptimistic. There is some justification for this: unlike the Treasury, the OBR does not use worst-case assumptions in making predictions.

But the case for spending cuts in excess of the £44bn previously planned by Darling remains unconvincing.

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