As I have long explained, if the government is to run a surplus within the economy somebody else has to borrow. That’s basic double entry book-keeping at play at a national level. It’s a fact that cannot be ignored or denied. What that also means is that if the government is to clear a big deficit somebody else has to borrow a lot more. This fact is reflected in the following chart from yesterday’s Office for Budget Responsibility forecasts:
The bottom, red line, is government borrowing. The grey area is the forecast. And the requirements for a government deficit are:
1) Households stick with much higher lending then they did from 2009 to 2013
2) The overseas sector borrows much more in the UK (which effectively requires a significant improvement in the balance of trade)
3) Business borrows heavily, which goes against a trend that has been persistent from at least 2001.
Unless those happen as a matter of fact George Osborne will not clear his deficit.
It’s important to note that he has missed all his previous forecasts on deficit reduction and I have to say I think he will do so again. To illustrate the point, the apparently innocuous flat line on personal borrowing requires substantial increases in household debt, as this OBR forecast shows:
First, that implies a massive change of behaviour for which there is no evidence right now. Second, the resulting ratios imply dangerous levels of borrowing in the household economy that exceed pre-crash levels. The implications are obvious.
The assumed change in business behaviour is equally dramatic:
Someone is living in cloud cuckoo land if they think that this is going to happen.
And it’s only in cloud cuckoo land that Osborne’s budget will balance as a result because these assumptions are not just heroic, they are utterly implausible.