Philip Hammond deficit reduction plans have been branded unrealistic by the Institute for Fiscal Studies.
In his Budget speech earlier this week, the Chancellor of the Exchequer revealed the Office for Budget Responsibility (OBR) had revised downwards its GDP forecast for the next three years.
In its analysis of the Budget, the IFS said the OBR has “finally lost patience with its own over-optimism” about the UK economy and delivered a "pretty grim set of forecasts".
Paul Johnson, director of the IFS said the chancellor’s forecasts for government spending, contained in his Budget speech, were too optimistic.
He said: “Remember George Osborne’s March 2016 budget? It was projecting a surplus of £10bn in 2019-20. We are now heading for a £35bn deficit. That’s quite a turnaround.
"Part of that results from forecasts of poorer growth. A good part of it reflects spending decisions — more for prisons and infrastructure in last year’s autumn statement, more for social care in the March budget, more for health and housing this time.
"The spending plans of two years ago always looked too tight to be credible and so it has proved."
He said the plans published for the economy beyond the year 2020 lack credibility.
Mr Johnson said: “Budget decisions increase borrowing by £9bn in 2019-20 but reduce it by £3bn in 2022-23. That flatters the numbers in later years.
"That is one reason why the chancellor’s target to eliminate the deficit entirely by the mid-2020s looks increasingly implausible. The demands of a growing and ageing population, alongside the pent-up demands from public services starved of cash for a decade, would have made sure of that.
"Layer on higher borrowing and the possibility of weaker economic growth persisting, and achieving budget balance looks all the more difficult.”
The IFS analysis predicted that Britain's debt would not reach pre-crisis levels of 40 per cent of national income until the 2060s, but Mr Johnson warned this forecast assumed there would be no recessions in the next half century.
He said: "As the years go by the end of austerity keeps slipping out of view."
The IFS also pointed out that average earnings look like they will be nearly £1,400 a year lower than forecast in March 2016, still below their 2008 level.
Mr Johnson added: "We are in danger of losing not just one but getting on for two decades of earnings growth."
Many market participants question whether the established methods of measuring levels of economic activity are relevant in today’s world.
James Carrick, global economist at Legal and General, said traditional economic models can’t measure the impact of technological advances on GDP growth and inflation, with the economy usually performing better, and inflation being lower, than expected.
Casper Rock, chief investment officer at Cazenove, used the example of contactless payments technology to illustrate the point.
He said the technology is profoundly disinflationary, as it reduces the amount of staff time needed for a transaction. This means each transaction costs the vendor less, so has the effect of pushing the cost of sales down, which reduces inflationary pressure in the economy.
Contactless payments technology also boosts productivity, as it means an employee can serve more customers in the same period of time.
But neither of those effects could yet be captured in economic data, despite the technology being used in 30 per cent of transactions in the UK.
david.thorpe@ft.com
