Osborne faces £20bn black hole in UK public finances, says report

Austerity may last until 2020 and chancellor may have to make further cuts to welfare, local government and police, claims FT

George Osborne is facing a £20bn black hole in the public finances, which means austerity may have to continue until 2020, according to research by the Financial Times.

In a blow to the chancellor, who hopes to run a budget surplus in the next parliament, the research suggests 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.

Osborne is already committed to imposing £25bn in spending reductions between 2016-17 and 2017-18, which would have to include £12bn in welfare cuts.

The FT analysis of models by the Office for Budget Responsibility suggests Osborne will have to go even further. The chancellor, who will deliver the penultimate budget before the general election on 19 March, has said he will rely on spending cuts rather than tax increases to eliminate the remainder of the budget deficit. The FT’s research suggests that even greater cuts will have to be made to welfare, local government and police because other key areas of spending, such as the NHS and schools, are protected.

The FT’s economics editor, Chris Giles, has identified the new black hole by focusing on the difference between the actual deficit, which is on course to be around £111bn in 2013-14, and the cyclically adjusted deficit, due to be £85bn this financial year. Osborne had assumed he would need to target the lower figure.

The FT says the British economy is recovering quickly but adds that forecasts of its capacity for growth in the future have deteriorated.

Reports of a new black hole will pose challenges for all the main political parties. The Liberal Democrats have endorsed the Treasury’s overall fiscal consolidation plan. But they say it is wrong to rely solely on spending cuts and would instead introduce tax increases including a mansion tax.

Labour is committed to running a budget surplus by the end of the next parliament, but this would only apply to the current budget.

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