James Moore: The only surplus might be in the Chancellor's reserves of optimism

http://www.independent.co.uk/news/business/comment/james-moore-the-only-surplus-might-be-in-the-chancellors-reserves-of-optimism-10121476.html

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Outlook Now that George Osborne has finished throwing his confetti of numbers down the aisle of the House of Commons in an attempt to prolong his marriage with a weary nation’s finances, it’s time to ask an important question: do they add up?

If we look back to his first Budget, we have good reason to be sceptical. His promise to eliminate the deficit in a single parliament was based on forecasts and assumptions that have proved wide of the mark.

It’s true that the economy has done a bit better than expected. But the tax receipts have undershot, not least because wages have remained stagnant.

Now he has issued a fresh set of predictions. We are told that the deficit will be done and dusted during a second Tory term, with a surplus potentially arising in 2018-2019, after which austerity will be over. Hooray!

To back up this claim, Mr Osborne has pointed to the forecasts and assumptions of his “independent” Office for Budgetary Responsibility. The trouble is, you only need to tweak them slightly to get to a very different place. Neil Woodford, the fund manager who enjoys guru status in investment circles, has done just that. His analysis suggests that the only surplus we’re going to see in the next parliament will be in the Chancellor’s reserves of optimism – if he gets back into Number 11.

The OBR reckons we’ll see real growth in GDP of 2.3 to 2.4 per cent per annum over the next five years, with inflation assumed to return to over 2 per cent by the end of this period. That means nominal growth of 5.0 per cent by 2019-20 and a budget surplus. Hallelujah!

Mr Woodford, though, sees no reason for inflation to return to 2 per cent by that time. Au contraire. He’s also assumed an adjusted real economic growth rate of  1.8 per cent – in other words, what UK plc has actually delivered under Mr Osborne’s stewardship to date.

In doing this, he has only altered the OBR’s numbers slightly. But those alterations create a cumulative hole in the public finances of £120bn by the end of the next parliament (assuming a stable government). And far from an increasing surplus by 2019-20, it is the deficit that starts to increase again.

Of course, the Bank of England could always intervene to give inflation and growth a nudge; it has indicated that it might if the economy flirts with deflation for long enough. Oil prices could also start to rise again, generating inflation. Maybe the latest crackdown on tax avoidance will yield more than has been forecast – although I wouldn’t bank on that.

Other people have made other forecasts and projections – they do make for some pretty graphs. But the only thing we can really count on is that the next occupant of Number 11 Downing Street is probably going to have very little room for manoeuvre. As the election campaign heats up, anyone claiming otherwise is, bluntly, lying to you.