George Osborne is taking a reckless gamble by extending his fiscal targets out to 2017-18. Government borrowing will now remain at elevated levels for a prolonged period, said Richard Wellings.
The deficit reduction plan could easily be derailed by lower-than-forecast growth. Osborne is relying on robust growth in the medium term to boost tax revenues and enable him to meet his targets. But this cannot be guaranteed. Recent history shows that Office for Budgetary Responsibility forecasts are unreliable. Borrowing in 2013-14 is likely to be almost double the figure originally expected. If stronger growth fails to materialise, the UK could quickly lose the confidence of the bond markets and face a debt spiral.
Given the risks, it would have been wiser to take a more conservative approach. Deeper cuts would have made Britain more resilient to future growth shocks.
Article orginally published in City AM.