Higher projected borrowing means that there could be tough decisions ahead on tax and spending

The Chancellor predicted today that UK economic growth would slow from 3% in 2007 to around 1.75-2.25% in 2008, but would then pick up to around 2.25-2.75% in 2009.

The Chancellor argued that the slowdown in growth this year would only be a temporary cyclical phenomenon and that it did not therefore alter the medium-term outlook for the public finances in a significant way. Public borrowing would be higher than previously expected at £43bn in 2008/9, as compared to a Pre-Budget Report (PBR) forecast of £36bn, but by 2012/13 this gap in forecasts would be eliminated, with public borrowing falling to around £23bn by that year.

Nonetheless, cumulative public borrowing from 2007/8 to 2012/13 is now projected to be around £18bn higher than forecast in the October 2007 PBR.

Despite this higher borrowing profile, projections for the net debt to GDP ratio (excluding Northern Rock) showed the peak still to be just under the 40% limit set by the sustainable investment rule at 39.8% in 2010/11, which is up from the 38.9% forecast for that year in the PBR. However, this still suggests that there is close to a 50% chance that debt could exceed the Treasury’s 40% of GDP limit by 2011 (excluding Northern Rock).

The attached table compares the new Treasury public borrowing forecasts with two alternative PricewaterhouseCoopers scenarios:

Alternative projections for public sector net borrowing (£ billion)

• in our main scenario, where the UK economy slows but does not suffer a recession, we see borrowing remaining somewhat higher than forecast by the Treasury in the medium term, although the difference of around £7bn in 2010/11 is within the margin of error of any such projections; and

• in an alternative ‘downturn scenario’ where the UK does suffer a mild recession over the next 12-18 months, however, public borrowing could rise much more rapidly to over £60bn within two to three years; this scenario is clearly less likely than our main scenario, but can certainly not be ruled out entirely at present.

The Chancellor was realistic to admit that growth will be lower than previously expected this year and that borrowing in 2008/9 and 2009/10 will be around £7bn a year higher than projected at the time of the PBR. But he is relying on a quick bounce-back in economic growth in 2009 and beyond to get public borrowing back on track in the medium term.

Whether economic growth will bounce back as quickly as the Chancellor expects is debatable – the risks are certainly weighted to the downside at present. In these circumstances, the Chancellor was prudent to avoid net tax cuts and reaffirm relatively tight public spending plans, but he may need to do more in the medium term if public borrowing turns out to be higher than he expects.