John Hawksworth, chief economist at PwC, said:

“The public finances are not looking quite as bad as they did a few months ago, but weaker than expected tax revenues are still likely to lead to a public borrowing overshoot of around £10 billion this year, even assuming the recent small undershoot on public spending growth continues. The Chancellor will therefore have very little money to play with in his Autumn Statement on 5^th December.

“Looking ahead, our more cautious assumptions on trend growth in a ‘new normal’ world mean that borrowing remains higher for longer in our projections: still almost £60 billion in 2016/17 as compared to an OBR projection in March that the budget deficit in that year would be only just over £20 billion.”

The table below summarises the latest PwC public finance projections as compared to those made by the Office for Budget Responsibility (OBR) at the time of the Budget in March 2012:

*Excluding effects of Royal Mail pension fund transfer and temporary financial interventions
**These are for fiscal years ending 31 March (calendar year projections are 0% for 2012 and 1.8% for 2013)

There are two key differences that drive the gap between public borrowing as projected now by PwC and the OBR borrowing forecasts in March:

• the PwC projections take account of a potential public borrowing overshoot of around £10 billion this year driven in particular by lower than expected receipts from VAT and corporation tax (especially from North Sea oil and gas companies); and
• in future years, the PwC projections assume a medium term trend growth rate of 2% as compared to the OBR assumption of 2.3% (the actual GDP growth rates in the table above are projected to be somewhat higher than these trend growth rates due to the scope to grow above trend for a period in order to close an initial spare capacity gap estimated at around 2.5% of GDP in 2011/12).

PwC analysis is still projecting a structural current budget deficit of around 0.5% of GDP in 2017/18, whereas the Chancellor would need a 0.5% of GDP surplus on this basis to hit his key rolling five year fiscal target with the same margin of comfort as assumed in the March Budget. Bridging this gap would require additional current spending cuts (or tax rises) of around 1% of GDP by 2017/18, or around £16 billion at today’s GDP values.

The PwC projections also suggest that the Chancellor would only meet his secondary fiscal target of getting the public debt to GDP ratio back on a downward path a year later than the current target date of 2015/16. However, this should not be a major concern so long as the debt ratio is falling by the end of the forecast period, which the PwC projections suggest should be the case (albeit from a higher peak of around 78% of GDP in 2015/16, rather than 76.3% of GDP in 2014/15 as in the March OBR forecasts).

John Hawksworth, chief economist at PwC, said:

“The Chancellor should not impose extra austerity immediately, given the current fragile state of the economy. Instead he could use his Autumn Statement to boost infrastructure investment over the next couple of years in areas like road maintenance, which can come on stream quickly to support the struggling construction sector. This would also provide some insurance against further adverse shocks to UK growth from the Eurozone or other sources.

“So as long as this extra capital spending is more than offset by cuts in recurrent spending in later years, it should not prevent the Chancellor from meeting his medium term fiscal targets. This will, however, eventually require some further painful fiscal medicine once the economic recovery is secure.”