Bloomberg News

Osborne’s Deficit Targets at Risk as U.K. Economy Stagnates

November 29, 2011

(Updates with gilts, pound in 11th paragraph. For more on Osborne’s end-of-year financial statement, click on UKBU.)

Nov. 29 (Bloomberg) -- Chancellor of the Exchequer George Osborne’s plan to reduce Britain’s budget deficit is under pressure from an economy that is bordering on its second recession in three years, according to a Treasury survey.

Government predictions today will show that Osborne needs to borrow an extra 86 billion pounds ($133 billion) over the four fiscal years to April 2015 as growth forecasts are lowered to just under 1 percent this year and cut by more than half for 2012, the survey of 14 economists published this month shows.

“While official projections for public borrowing are likely to be revised higher in response to weaker economic growth, there is little chance of a volte-face in fiscal policy that would fray bondholders’ nerves,” Andrew Kenningham, an economist at Capital Economics in London, said in a note to clients.

Osborne says he will “do what it takes” to maintain Britain’s credibility with investors and shield the U.K. from the sovereign debt crisis in the euro area. A Treasury official said the government’s fiscal credibility has reduced debt- interest costs by more than 21 billion pounds from forecasts made in March.

The deteriorating outlook means Osborne may have to extend spending cuts, so that austerity continues during the first two years after the next general election due to take place in 2015.

More Pain

“An even longer period of fiscal consolidation probably lies ahead,” Michael Saunders, chief European economist at Citigroup in London, said in a note to customers.

The government’s forecasts, prepared by the Office for Budget Responsibility and due be presented to Parliament by Osborne at 12:30 p.m., will show the economy expanding at a slower pace than the 1.7 percent rate seen eight months ago.

Barclays Capital expects growth to be as low as 0.9 percent this year. Growth next year is unlikely to be better, with Citigroup predicting as little as 0.7 percent. The survey average was 1.1 percent.

“We would be surprised if the OBR pitches its forecast in recessionary territory, but probably instead look to a period of stagnation over much of 2012,” said Philip Shaw, chief economist at Investec Securities in London.

Jobless claims will rise to 1.75 million next year while inflation will fall to its 2 percent target by 2013, the survey shows.

U.K. government bonds opened higher, pushing the 10-year gilt yield down four basis points to 2.23 percent at 8:12 a.m. London time. The pound was little changed at $1.5517.

Political Divide

The deteriorating economic outlook and worsening public finances has intensified the government’s battle with the opposition Labour Party, which says Osborne’s austerity plan is too aggressive given the weakness of the global economy.

“They said if we go faster on deficit reduction, it would lead to private-sector jobs, to growth, to confidence, to falling unemployment, but it hasn’t worked,” Ed Balls, who shadows Osborne in Parliament, told BBC television this week.

The weak outlook led the Organization for Economic Cooperation and Development to say that the Bank of England will probably add to stimulus early next year as the economy slides back into recession.

The Paris-based organization forecasts the central bank will increase its asset-purchase target by 125 billion pounds in early 2012, boosting the program to 400 billion pounds.

‘Headwinds Are Strong’

“More support is needed urgently as headwinds are strong,” the OECD said in a report yesterday, citing falling government and consumer spending and weakening global growth. “Quantitative easing should be expanded further still if the economy weakens more than expected.”

Osborne will announce fiscally neutral ways of boosting economic activity, including a 20 billion-pound “credit easing” program in which the government underwrites small company lending. He will also propose tapping pension-fund savings to inject 30 billion pounds into infrastructure projects and extend a child-care program for 260,000 poor children valued 650 million pounds over three years.

--Editors: Andrew Atkinson, Eddie Buckle

To contact the reporter on this story: Gonzalo Vina in London at gvina@bloomberg.net

To contact the editor responsible for this story: James Hertling at jhertling@bloomberg.net


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