U.K. Panel Faces Big Test Next Week

By LAURENCE NORMAN sourced from Wall Street Journal


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.

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There were warnings tonight that the government will be forced to hit consumers with a VAT hike to 20% if it is to reduce the country's gaping budget deficit and retain the confidence of jittery financial markets.


Such a rise could cost every household in Britain £425, but the government may have little choice given the state of the public finances, economists warned. The coalition's plans outlined so far on the deficit quickly came under City scrutiny, with one institution warning that in their current state they would actually worsen the country's budget position.

Credit Suisse said the measures announced would add close to £10bn per year to the deficit, contrasting with the incoming government's emphasis on the need for "a significantly accelerated reduction".

The easiest solution would be a VAT rise, Credit Suisse added, echoing other economists but raising fears of a blow to already fragile consumer confidence and more upward pressure on inflation.