Deficit Means Britain Must Brace Itself for a Painful Budget; ECONOMIC ANALYSIS

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Byline: Hugo Duncan

MAKE no mistake, the new Treasury watchdog has paved the way for a painful Budget next week.

The Office for Budget Responsibility may have forecast lower borrowing levels over the next five years, but for Chancellor George Osborne that's where the good news ends.

The OBR health check says economic growth will be far weaker than predicted by former Chancellor Alistair Darling in his final rose-tinted Budget in March.

It also warns that Britain's long-term growth prospects are not as strong as previously thought due to the country's ageing population.

One implication of this is we will be asked to work a lot longer. Another is that the all-important structural deficit -- the part of borrowing which does not disappear automatically as the economy grows -- is bigger than feared. Labour says lower levels of borrowing and muted economic growth mean further tax rises and spending cuts are unnecessary and dangerous.

Osborne, the first Conservative Chancellor for 13 years, sees it differently. "This is damning evidence that the mess the previous Government left behind is even bigger than we thought," he says.

The highly respected Institute for Fiscal Studies agrees.

"The underlying health of the public finances looks worse than Mr Darling suggested," says IFS director Robert Chote. "The OBR has set the scene for a painful Budget."

A key issue for the City will be the size of the deficit in 2014-15. Labour pledged to cut it from 11.1% of gross domestic product this year ([pounds sterling]163 billion) to 4% in 2014-15 ([pounds sterling]74 billion).

That got the thumbs down from the financial markets.

The OBR, headed by Sir Alan Budd, thinks it will fall to 3.9%, but that still leaves it too high for comfort as far as many observers are concerned, including, one suspects, Osborne himself. …