Risks to the UK economy from a euro zone break up continue to loom large, according to the latest forecast from the Institute for Fiscal Studies.
On the positive side, its Green Budget suggests that, even relative to major planned cuts, Whitehall departments will underspend by more than £3billion this year.
The result of the underspend is that the Government will borrow slightly less in 2011–12 (£2.9billion) than the latest official forecast.
The IFS is also more optimistic about future tax receipts than the OBR, meaning that if the economy broadly evolves as the OBR expects then borrowing could be £9billion lower in 2016–17 than the official forecast.
But significant downside risks to the public finances, combined with long-term pressures from an ageing population, suggest that the Chancellor has little scope for a significant permanent fiscal loosening relative to current plans.
The risks to the IFS's central forecast are very much on the downside. Should the euro zone break up, or the economy do much worse than forecast for other reasons, then future borrowing would be increased and one – or both – of the Chancellor’s fiscal targets would be broken.
The case for a significant short-term fiscal stimulus to boost the economy is stronger than it was a year ago. There seems little prospect that it would prompt an offsetting monetary tightening in the present climate. But a small loosening would be likely to deliver only a small boost to the economy, while a big one might risk undermining investor confidence.
Professor Paul Boyle, Chief Executive of the Economic and Social Research Council which funded the research said: "As the Chancellor prepares for the spring Budget and the economy is being debated at all levels of our society, it is important to ensure that rigorous and independent academic analysis is undertaken on the UK economy.
"In forecasting the UK economy we need to consider and evaluate the contributions of current fiscal strategies and look to develop new approaches for growth. It is for this reason the Economic and Social Research Council supports the launch of the IFS Green Budget report."
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