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22 March 2011

More economic woe for Osborne

Higher borrowing and higher inflation figures announced the day before the Budget.

By George Eaton

A cocktail of economic woes for George Osborne this morning. The worst inflation figures for 28 months and the worst February borrowing figures since 1993 aren’t the sort of headlines you want the day before a budget.

CPI inflation now stands at 4.4 per cent, the highest level since October 2008 and, after a healthy surplus of £3.7bn in January, public-sector borrowing rose to £11.8bn in February, £2.3bn higher than a year ago and nearly double the £6.9bn forecast by economists. Total borrowing (£123.5bn) is still £13.1bn lower than the same period last year but Osborne will now have even less room for manoeuvre on Wednesday.

And the situation is only likely to get worse. As today’s FT cover story explains, the “wrong kind of inflation” means that borrowing is likely to be significantly higher than the Office for Budget Responsibility forecast from 2012 onward. The parlous state of the labour market means that wages and, consequently, tax revenues aren’t rising as fast as they normally would in a period of high inflation. But inflation-linked state benefits are surging all the same. The net result is higher borrowing.

It all provides Ed Balls with plenty of ammunition for his second Commons bout with Osborne this afternoon. He warned that the coalition’s premature spending cuts would reduce economic growth, increase unemployment and slow the pace of deficit reduction. He’s been proved right on every count.

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Meanwhile, the dreadful inflation figures will embolden the Bank of England hawks demanding the base rate be raised from its emergency level of 0.5 per cent. If they succeed, the coalition’s economic strategy could begin to unravel.

Osborne is desperate for the cost of borrowing to remain low in order to offset the impact of the cuts. After all, it worked for a Conservative chancellor before. Following the savage cuts of the 1981 Budget, Geoffrey Howe cut interest rates by 2 percentage points and the economy surged as a result. But with the dramatic rise in the cost of living, it’s becoming ever harder for the Chancellor to make this argument.

A combination of tighter fiscal policy and tighter monetary policy could overwhelm the British economy.