LONDON — When the U.K.'s brand-new fiscal council, the Office for Budget Responsibility, laid out its fiscal and economic forecasts a week ago Monday, it was widely praised for its careful, comprehensive work.
Yet the same office will face a bigger test Tuesday when Treasury chief George Osborne delivers his emergency budget statement and the OBR revises its forecasts in light of those plans.
That will force the OBR to give its judgment on the central question in U.K. politics for the last year, including the recent election campaign: whether stepped-up deficit reduction will lift the jobless rate and derail a still-fragile economic recovery.
The OBR was set up by Mr. Osborne last month to add credibility to government fiscal plans. The independent fiscal council was given the power to make the key growth and borrowing forecasts that underpin the budget plans, a power previously exercised by the Chancellor of the Exchequer.
In its debut act on Monday, the OBR lowered the growth forecasts the previous government had given in its March budget. The OBR surprised some by cutting borrowing forecasts for coming years but raised the estimate of the closely watched structural budget gap—the estimate for the size of the deficit once the economy returns to a rate of growth in line with its long-term trend.
However, Monday's OBR forecasts were based on the economic and fiscal plans set out in the March budget by Mr. Osborne's predecessor, Alistair Darling.
Mr. Osborne has been crystal clear that he sees Tuesday's emergency budget as a turning point in grappling with a budget deficit that reached £156 billion ($230 million)in the last financial year.
The chancellor has said that the key danger to the U.K. economy isn't early fiscal consolidation and spending cuts but inaction on the budget deficit, which could see the U.K. lose its AAA credit rating, leading to spiraling borrowing costs and falling economic confidence.
Michael Sanders, U.K. economist at Citigroup
, said Mr. Osborne will announce an extra £25 billion in fiscal tightening, split between £10 billion in tax hikes and £15 billion in spending cuts. Around half of those cuts have already been outlined by the new government. However, those plans have been fiercely opposed by the opposition Labour Party. Throughout the election campaign, Labour vowed to stick by its plan to halve the deficit over the next four years and delay spending cuts until 2011.
Labour has consistently argued that major spending cuts this year could stymie the recovery and said that the private sector isn't yet in a strong enough position to offset public-sector job losses.
There was further evidence of improved U.K. public finances in May, with borrowing coming in below expectations and the previous month's numbers revised down, official data showed Friday.
However, with interest payments on the debt rising, and the budget deficit having exceeded 10% of gross domestic product in the last financial year, the improved data are unlikely to dissuade Mr. Osborne from announcing deep spending cuts
For several months now, increased tax receipts--including from the bankers' bonus tax and a strong pickup in value added tax--have slimmed U.K. borrowing and left the public finances looking healthier than many economists had predicted.
That was the case again Friday. The Office for National Statistics said the public sector borrowed a net £16.0 billion in May, down from £17.4 billion in May 2009. Economists
surveyed by Dow Jones 
Newswires had expected net borrowing of £19.5 billion
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