What happens if growth disappoints?

“We have all had to revise down our short-term expectations over recent weeks” said George Osborne to a City audience on Tuesday, preparing the ground for a likely downgrade of growth forecasts by the Office for Budget Responsibility in November.

This would be the fourth downgrade by the OBR since Osborne’s emergency budget last June.

So what if the downgrades just keep on coming and growth continues to undershoot? What happens, in that case, to the nation’s public finances?

Dr Tim Morgan, head of research at the financial firm Tullett Prebon, has done a projection (p 24-25) in a new (ultra-bearish) report on the UK’s economic future.

Here’s what happens to the deficit if trend growth turns out to be 1.4 per cent per annum over the next four years  (about half the rate currently projected by the OBR):

And here’s what happens to the levels of public debt as a share of GDP under those circumstances:

So if growth is that disappointing, the Chancellor will enter the next election borrowing more than 8 per cent of GDP and with debt levels at more than 100 per cent of GDP and rising.

Morgan argues that there’s nothing that the Chancellor can do to avoid this fate. Ed Balls and Labour say it would be a result of cutting  too much, too fast.

Whatever view one takes on policy, if this bearish view is realised (and remember that the macro bears have been proven right so far), that is going to be a pretty tough record for the Government to defend in 2015 having promised Britain the sunlit uplands of sound public finances.

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