OBR warns Javid's spending plans risks breaking borrowing rules

Chancellor Sajid Javid was on Tuesday warned that his planned public spending increases were on track to break government borrowing rules.

The Office for Budget Responsibility (OBR) said Javid had set a course for the public finances that would probably breach a Conservative manifesto pledge to deliver balanced budgets by the mid-2020s.

OBR chairman Robert Chote on Monday told the Treasury select committee the government was “not obviously on course to achieve that” promise. “Any additional spending today would take you further away rather than closer to it.”

Javid said he would comply with the 2017 spending rules introduced by the Conservatives under former prime minister Theresa May which state that national debt must fall as a percentage of GDP in 2020-2021 while borrowing as a percentage of national output, adjusted for economic fluctuations, must also remain below 2% of GDP by the same year.

The Tories also promised to eliminate the budget deficit – the shortfall between spending and income from taxes – by the mid-2020s.

The latest spending review includes the biggest annual increase in spending for 15 years.

The Chancellor said in his statement that “with the extra spending we are still meeting the current fiscal rules” and an accompanying Treasury document stated that “this spending round has been delivered within the current fiscal rules” but it added in a footnote that the judgement is “based on the OBR’s March 2019 forecast” and not a contemporaneous assessment.

In March the OBR forecast that the structural budget deficit would be 0.8% of GDP in 2020-21, giving headroom against the fiscal mandate of £26.6bn.

As a result of the March forecast, the latest spending review includes the biggest annual increase in spending for 15 years with £13.8bn of investment in areas including health, education and the police. Economists have warned that Javid's room for manoeuvre could be tight if fears of a recession become reality.

Since March, the UK's gross domestic product (GDP) shrank by 0.2% during the second quarter and if it contracts again between July and September, the country would officially be in recession.

One of the main triggers for a recession would be the economic impact of a no-deal Brexit, which Prime Minister Boris Johnson is refusing to rule out.

According to KPMG’s latest Economic Outlook for the UK, a no-deal Brexit could prompt a four-quarter recession, with GDP contracting by 1.5% next year.