UK Fiscal Deficit May Force Austerity Measures

The problem with recoveries after a deep recession is a lot of the good news peters out rather quickly. The easy gains are made early on and then you are left assessing the irreparable damage that was done by the downturn.

And that is the nub of the FT report: grim reading for chancellor George Osborne as he puts the finishing touches to his 19 March budget.

According the FT’s analysis of models by the Office for Budget Responsibility, austerity may have to last a year longer than expected because the government will not be able to rely on economic recovery to eliminate part of the deficit. The FT’s economics editor, Chris Giles, has identified the new black hole by focusing on the difference between the actual deficit (the gap between government expenditure and income such as taxes), which is on course to be around £111bn in 2013-14, and the cyclically adjusted deficit (the gap that is left when the peaks and troughs of the economic cycle are taken out of the equation), due to be £85bn this financial year. Osborne had assumed he would need to target the lower figure.

As Giles says, the gap lays bare the consequences of Britain’s falling productivity. It is a pessimistic outlook for those facing more spending cuts and for governments now having to contemplate tax rises to plug the gap. But the pessimism is entirely warranted if the OBR’s own analysis of productivity is to be believed.

via The Guardian

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Alfonso Esparza

Alfonso Esparza

Senior Currency Analyst at Market Pulse
Alfonso Esparza specializes in macro forex strategies for North American and major currency pairs. Upon joining OANDA in 2007, Alfonso Esparza established the MarketPulseFX blog and he has since written extensively about central banks and global economic and political trends. Alfonso has also worked as a professional currency trader focused on North America and emerging markets. He has been published by The MarketWatch, Reuters, the Wall Street Journal and The Globe and Mail, and he also appears regularly as a guest commentator on networks including Bloomberg and BNN. He holds a finance degree from the Monterrey Institute of Technology and Higher Education (ITESM) and an MBA with a specialization on financial engineering and marketing from the University of Toronto.
Alfonso Esparza