'Weaker economic outlook' could prompt public spending cuts, economists say

Chancellor George Osborne is expected to overshoot his borrowing targets and see forecasts for the UK economy downgraded amid a gloomy outlook for the global economy.

Economists say sluggish UK growth prospects will create a bleak fiscal picture for Mr Osborne through weaker tax receipts and uncertainty over global growth.

It means the Chancellor may resort to cutting public spending or increasing fuel duty in order to achieve his budget surplus of £10.1 billion by 2019/20.

Independent forecasts from the Office for Budget Responsibility (OBR) predicted in November's autumn statement that the UK economy would grow by 2.4% in 2016, 2.5% in 2017, 2.4% in 2018, 2.3% in 2019 and 2.3% in 2020. Experts believe the OBR could cut this forecast for both this year and next by between 0.2 and 0.5 percentage points.

Mr Osborne's warning at the start of the year that the UK economy faced a "cocktail of risks" has rung true, with market volatility, a slowdown in China and weak commodity prices all bearing down on the domestic economy.

A report by Scotiabank said a downgrade of half a percentage point could increase borrowing by around £5 billion.

However, the Chancellor may take some hope that the falling price of Brent crude can help offset some of the decline in gross domestic product growth, with cheaper petrol at the pumps helping to boost public spending and the wider economy.

It may also have another positive impact of the Government's coffers by bringing about lower inflation and easing the interest burden on its debt.

The price of oil - which has fallen some 70% since its peak in the summer of 2014 - is likely to see the OBR's estimate for inflation projection to be cut back by around 1% to about 0.6% year-on-year, according to Alan Clarke at Scotiabank.

But Mr Osborne is unlikely to be able to rely on growth in the UK economy in order to meet his target for public borrowing.

With only two months to go, the Chancellor is expected to miss the OBR's forecast of £73.5 billion for the financial year to March, with economists now pencilling in borrowing of around £77.5 billion.

It comes despite the Office for National Statistics revealing a brighter picture for Government finances earlier this year, with public sector net borrowing excluding banks in surplus by £11.2 billion in January, fuelled by strong tax receipts.

There has been speculation the Chancellor may seek to shore up government finances by raising billions of pounds in extra taxes by raiding banks and insurers while also unveiling swingeing cuts to public spending.

His plan may include raising the insurance premium tax and also pulling in an extra £6 billion from the bank profit surcharge, according to reports.

Experts at Investec Economics said: "The weaker economic outlook will leave Mr Osborne with his work cut out in matching his spending plans as lined out in November.

"We think the most likely option will be to allow for an ever so slightly slower closing in the deficit, while still keeping to the fiscal mandate. Indeed, 2019/20 surplus of £10.1 billion projected in November provides a margin of wiggle room."