UK public finances improving - was the VAT rise necessary?
Simon Ward
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The latest public finances numbers remain consistent with a substantial undershoot of the Office for Budget Responsibility (OBR) forecast of net borrowing of £149 billion in 2010-11 (excluding the temporary impact of financial interventions).
Attempting to adjust for seasonal factors, borrowing averaged about £12 billion in the first four months of the fiscal year, or £144 billion annualised – see chart. The OBR forecast, therefore, implies a worsening over the remainder of 2010-11.
This is unlikely because, first, the benefits of economic recovery should grow as the year progresses and, secondly, the coalition has announced £8.1 billion of spending cuts and tax rises in 2010-11, most of which has yet to take effect. Put differently, even assuming no further impact from an improving economy, these measures together with the recent run-rate imply borrowing of £136 billion this year (i.e. £144 billion minus £8 billion), £13 billion less than the OBR's forecast.
The evolving undershoot increases doubts about the wisdom of the coming VAT rise – projected to raise £2.9 billion and £12.1 billion in 2010-11 and 2011-12 respectively. This increase threatens to weaken the economic recovery and was not strictly necessary to meet the new fiscal target of current budget balance by the end of the parliament, even according to the OBR's June forecast.
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