Osborne to miss deficit target as UK economy stalls and unemployment rises

George Osborne is braced to admit this month that the scale of Britain’s economic slowdown, demonstrated by youth unemployment spiralling to more than 1 million, means he will be unable to meet his main deficit reduction target before the next election.

It is now expected that the Office for Budget Responsibility (OBR) will declare at the time of Osborne’s autumn statement on 29 November that the downturn’s impact is more permanent than thought and the government may not be able to meet its commitment to eliminate the structural deficit – the part of the deficit unaffected by growth – by 2014-15, as he predicted in the June 2010 budget.

The expected delay is symptomatic of the damage on the public finances being wrought by lower-than-expected growth and deepening unemployment.

The admission over deficit reduction does not mean the chancellor will break his mandate, as that gave him the leeway to eliminate the current structural deficit either by 2014-15, or a year later.

In his emergency budget immediately after the election, he suggested he would do it earlier, saying “we are on track to have a balanced current structural budget by the end of the parliament”.

But the Treasury will by now have seen, confidentially, the OBR’s forecasts for growth and public finances and they are likely to reflect the downgrading of growth forecasts made by the Bank of England on Wednesday.

The Bank cut its 2011 and 2012 growth predictions to about 1% with its governor, Sir Mervyn King, predicting that growth would remain broadly flat until the middle of next summer.

He said the crisis in the eurozone was his biggest concern, and he also predicted that the economy would not recover in 2013 as fast as he previously suggested, implying he sees a deeper structural problem.

“The journey to a more balanced world economy will be long and arduous,” King said. “In the last three years, we have seen extraordinary events. Who knows what’s going to happen tomorrow, let alone next month?” he said in the Telegraph.

The governor’s gloom came as the UK unemployment total rose by 129,000 in the three months to September to 2.62 million, the highest since 1994. The unemployment rate rose to 8.3%, the highest since 1996. The number of women out of work reached its highest level since February 1988, an increase of 43,000 to 1.09 million. Youth unemployment – those aged 16 to 24 – went over 1 million, prompting warnings of a “lost generation”.

While the bad news is unlikely to persuade Osborne to change economic course, it also makes the prospect of pre-election tax cuts even more remote.

Next week, the coalition plans to announce fresh incentives to help the long-term young unemployed, in line with proposals put to David Cameron by business leaders on Wednesday.

But the government is also lobbying the International Labour Organisation to remove students in full-time education from the headline total of youth unemployment. Just over 286,000 students are included in the figures.

The deputy prime minister, Nick Clegg, has pointed out that youth unemployment has been rising since the middle of the last decade, suggesting a deeper structural labour market problem.

The employment minister, Chris Grayling, blamed the eurozone’s troubles for the rise in joblessness. “These figures are bad news. They are … the consequence of what we’re seeing in the eurozone.”

“If you go back four months, unemployment was falling, youth unemployment was lower than 900,000. We’ve seen a big slowdown in the economy I think as a result of the crisis elsewhere.”

But the business secretary, Vince Cable, declined to blame unemployment on the euro crisis, telling Channel 4 News the problem lay in low domestic demand.

“I would certainly not blame the euro-crisis. The problem particularly of youth unemployment is deep rooted and has been with us for a very long time. Our domestic economic conditions are very difficult in large part because of the legacy we have to deal with. I am not trying to look for a scapegoat or a way of escaping responsibility for it.”

Paul Johnson, director of the Institute for Fiscal Studies, said there was a growing likelihood the OBR would say the recession had inflicted deeper permanent damage than thought: “That is going to be the big judgment for the OBR. How much of what we have seen over the last year do they think is structural and how much do they think is cyclical? Six to nine months ago, there was a lot of disagreement among the macro-economists in the City about what kind of recession it was and how fast we were going to bounce back.

“There were some who thought the OBR forecasts were perfectly fine. There were some who thought they were very optimistic. There has been a clear movement in the consensus and nearly all forecasters think that, at least over the next couple of years, things will turn out significantly worse than the OBR was forecasting back in March.”The macro-economic consensus appears to be swinging behind the view that the recession, created by a major financial crisis, and the overhang of debt in public and private sectors, could have a longer effect depressing economic activity than many thought likely a year ago.”

Labour pointed to the Treasury’s monthly collation of independent forecasts published on Wednesday showing the consensus now forecasts the government to borrow £109bn more over this parliament than the chancellor planned. They also show the government could even end up borrowing billions more than Labour set out before the election – despite the pain of £40bn more spending cuts and tax rises.