In a recent report given by the Office for Budget Responsibility, it appears as though there is a £12 billion error in the budget which had gone unnoticed previously. It is unclear how £12 billion, or 25% of the 2011 – 2012 budget could just be unaccounted for, but according to their figures detailing the government’s borrowing model, there is £12 billion unaccounted for.
If the OBR is correct, as stringent as the austerity programme is, the deficit will carry over into the new parliament. These figures were reported by the Financial Times and they state it is clear in replicating OBR data, there will not be as much growth as in previous forecast. In fact, it also appears as though much of this deficit is permanent and will not be affected by the economy if it does bounce back.
In their summary of the problems facing the government, the FT observed that the coalition is facing difficult decisions ahead. They can either extend the austerity measures or they can introduce further cuts and/or increases in tax to try to balance the budget in keeping with the current schedule.
It was further reported that the Treasury had been agonising over whether or not to take stricter actions if the deficit was indeed larger than previously anticipated. Further, measures might require raising of the VAT to 22.5% up from 20%. At the moment, decisions have not been made but there are still those in the Treasury who feel that indeed further measures will be necessary given the situation.
Conversely, Liberal Democrats stated their desire that no deviation should be made from the plans currently in motion. Since growth is waning, they feel markets would not expect the UK to go further with more drastic measures. No one likes the prospect of a long and drawn out austerity scheme and certainly no one is keen on raising VAT. Since there is but two months before the Chancellor’s autumn statement, there is yet time to agree on some decisive action that is acceptable to both parties of the parliament.