The UK's debt burden is likely to swell by an extra £45bn over the next five years as the spluttering economy fails to grow as fast as expected, experts warned today.
Chancellor George Osborne is set to undershoot the Office for Budget Responsibility's borrowing target of £127bn for the current year, due to a tighter than expected clampdown on spending and higher public-sector job losses. But the good news will probably end there for the Chancellor, as growth fails to match the optimistic 3 per cent a year pencilled in by the independent watchdog for 2015 and 2016.
David Page, the chief UK economist at Lloyds Bank Corporate Markets, warned that a banking system clawing its way back to health and facing regulator demands to hold more capital would act as a handbrake on the economy. "We remain sceptical of the longer-term forecasts that envisage economic activity accelerating in excess of 3 per cent," he said. "Structural changes to the banking system could see credit conditions remain tight, reducing the likely trend level of output in the UK economy.
"Such a shortfall in growth would leave the headline Budget deficit higher than projected – our own estimates suggest by around £45bn over the coming five years."
The OBR is likely to leave its near-term forecasts unchanged after sharply slashing its forecasts for 2012 to just 0.7 per cent last November. But HSBC's chief UK economist, Simon Wells, also accused the OBR of over-optimism which could put borrowing forecasts in later years under pressure, because its assessment of the UK's potential "trend" growth is too high.
This judgement is crucial because if the UK has lower long-term growth prospects Mr Osborne will have to cut the deficit with deeper spending cuts or tax rises rather than relying on growth to get the economy out of its current malaise.
Mr Wells warned: "The OBR assumes trend productivity growth of 2.2 per cent but this seems on the high side. We think growth in the region of 1.5 to 2 per cent is more plausible."