Slowdown to blow a hole in UK’s budget

GEORGE Osborne will be dealt a fresh blow this week as figures show the British economy is not as strong as expected.

An official report published on Thursday is set to show that output rose by just 0.4pc in the final three months of 2015.

That would mean the economy grew by 2.2pc last year – down from 2.9pc in 2014 and weaker than the 2.4pc pencilled in by the Treasury. The slowdown could blow a hole in the Chancellor’s plans to balance the books, forcing him to raise taxes or cut spending in his Budget in March.

Borrowing has fallen from a record of more than £153bn in 2009-10 to £94.7bn last year, but the Treasury is struggling to hit its target of cutting the deficit to £73.5bn this year.

Osborne has pledged to run a surplus of more than £10bn in 2019-20 – the first for two decades. But it is feared that the economic slowdown could hit tax receipts, knocking his plans off course.

Speaking at the World Economic Forum in Davos last week, the Chancellor (pictured) described Britain as ‘a chink of light cutting through the global gloom’. But he repeated his warning, first made at the beginning of the year, that the UK faced ‘a dangerous cocktail of risks’ from around the world, including turbulence on financial markets and a slowdown in China.

Bank of England governor Mark Carney described the global financial backdrop as ‘unforgiving’ as he insisted that ‘now is not yet the time’ to raise interest rates in the UK.

Investors now believe that rates will stay on hold, at their historic low of 0.5pc, until well into next year in a boost for borrowers but a pummelling for savers who are enduring paltry returns on their nest eggs.

Martin Beck, lead UK economist at Oxford Economics, said: ‘We think that the markets have probably got ahead of themselves and a rate hike at the end of 2016 is still the most likely prospect. But that the economy is judged to be still too weak to cope with a rate rise until so far into the future, seven years after the recession ended, sends a gloomy message.’

Howard Archer, chief UK economist at IHS Global Insight, said he now expects the economy to grow by just 2.1pc this year – some way shy of the 2.4pc predicted by the Treasury.

‘With the UK clearly finding growth hard to come by at the moment and facing significant domestic and global uncertainties, we are trimming our growth forecast for 2016 to 2.1pc,’ said Archer.

The Office for Budget Responsibility, the official Treasury watchdog, may be forced to cut its forecasts in the Budget in March.