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Deficit may not be paid off by election - IFS

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Chancellor George Osborne risks missing his target of eliminating Britain’s national deficit by the next general election because of below-par growth and “formidable” difficulties delivering cuts, a respected economic thinktank has warned.

The Institute for Fiscal Studies’ annual Green Budget had good news for the chancellor in the short term, predicting he will need to borrow £2.9bn less than expected this year.

But it warned Mr Osborne not to use this cash to fund tax give-aways in his 23 March Budget, but to “bank” the money to help deal with risks further down the line.

The tax breaks advocated by some business groups to help boost growth could prove “ineffective” because they would risk triggering rises in interest rates to rein in inflation, said the IFS.

And the thinktank warned that any fiscal loosening designed to help the economy could undermine investor confidence that the Government will see its cuts strategy through.

Following “disappointing” figures last week - which showed GDP shrinking by 0.5% in the last quarter of 2010 - growth over the medium term is likely to be lower than predicted by the Office for Budget Responsibility (OBR), whose forecasts are used by the chancellor to plan his Budget, warned the report.

Analysts from Barclays Wealth and Barclays Capital - which prepared the report in collaboration with the IFS - said the economy was likely to grow roughly in line with the OBR’s 2.1% forecast for 2011.

But they warned that in following years, growth was likely to be less than the OBR forecasts, with a projected deficit on the cyclically-adjusted current budget of 0.4% of national income in 2015/16.

This would mean that “current policy would not be consistent with the chancellor’s fiscal mandate” of paying off the deficit by the election, said the report.

Only an “optimistic” view of the future would see the economy developing as the OBR expects and Mr Osborne meeting his targets, said the Barclays experts Michael Dicks and Simon Hayes, while a “pessimistic” view would see public sector net debt still rising in 2015/16.

Meanwhile, the report warned that the government’s package of £81bn cuts in public spending could be “formidably hard to deliver”.

The cuts are “more ambitious” than those imposed by John Major’s administration in the early 1990s and will be more difficult to achieve, said the IFS.

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