Analysts describe as credible a claim that the country's structural deficit is 25% bigger than previously thought

Britain could face many more years of austerity to balance the country's books, City economists warned, after a potential £12bn black hole was found in the public finances.

A calculation in the Financial Times says the structural deficit — the deficit that persists even if the economy is growing at its full potential — is 25% bigger than previously thought, leaving chancellor George Osborne with a £12bn gap. Plugging it would require new austerity measures equivalent to raising VAT to 22.5%.

Analysts described the claim as credible because the calculation was based on the Office for Budget Responsibility's own methodology.

Carl Emmerson, deputy director of the Institute for Fiscal Studies, a respected think tank, said: "It's getting more likely that we are going to have to see more pain in the next parliament – the squeeze in spending will go on or tax rises. The chances of a pre-election give-away look less likely. Austerity is getting more likely to continue into the next parliament."

However, Barclays Capital analyst Chris Crowe said that even with such a shortfall, the government would still just meet its target of eliminating the structural deficit by 2015/16. It is forecast to hit almost £50bn this year.

"But the margin is so tight, any additional changes in assumptions could tip it over the edge. It's touch and go," Crowe said. He has long argued that the government will struggle to hit its fiscal targets, saying the OBR's estimates for economic growth are too optimistic.

But Crowe said: "Any further austerity measures would be undertaken with reluctance if there is a general deterioration in the economy. It seems clear that the [existing] austerity measures have contributed to the general poor state of confidence, both business and consumer confidence, and so additional measures would only make it worse at this stage.

"On the other hand, the government has set great store by its pledge to meet its targets."

He thinks that "fairly minor measures" to keep the public finances on track might be unveiled by the chancellor in his autumn statement on 29 November, should the OBR's latest projections indicate that his borrowing plans are slipping. A Treasury spokesman declined to comment, noting that the official forecast is produced by the independent OBR, which will update its forecasts in November.

Philip Shaw, chief economist at Investec, said: "I'm not convinced that hitting the economy with further tax increases or spending cuts is the appropriate course of action. Could we see a 2.5% hike in VAT? I very much doubt it.

"I would very much question George Osborne's appetite for further fiscal tightening, let alone the Liberal Democrats'."

One issue is whether the economy has less spare capacity – ie room to grow sustainably – than previously thought, as Charlie Bean, deputy governor of the Bank of England, conceded last month. "We have a high degree of uncertainty about what the spare capacity in the economy is, but our assessment is that... the recession has led to a relatively long-lasting hit on... spare capacity."

If there is less spare capacity in the economy than previously thought, a bigger portion of the government deficit will be permanent, rather than being wiped out once the economy bounces back.

As the OBR's chairman, Robert Chote, explained in March: "The amount of spare capacity you have determines how far the economy can grow in a sustainable way and, therefore, how much of the deficit that we have at the moment will be soaked up naturally as the economy recovers and how much, as it were is left for policy to deal with." He admitted that the biggest uncertainty in the OBR's forecasts was whether it had correctly estimated the amount of spare capacity.

http://www.guardian.co.uk/business/2011/sep/19/economy-austerity-black-hole-osborne

Awesome.

Well there's the cure for obesity.... No money, you can't afford food, or transport or even heating etc. Means getting off ya arse and walking every where and running round to keep warm.

For every silver lining there's a black cloud.

We have saved the economy looks rather hollow and slightly foolish at the moment mr Osborne

Extract from Vince the Cable/business secretary's speech who, despite everything, knows a fucked up economy when he sees one:

"We now face a crisis that is the economic equivalent of war. The financial crisis is still with us. It never went away. And we can see that recovery has stalled in the US and the position in the Eurozone is dire. But it is wishful thinking to imagine that we have a healthy economy being infected by a dangerous foreign virus. Many of our problems are home-grown. Gordon Brown regularly advised the rest of the world to follow his British model of growth. But the model was flawed. It led to the highest level of household debt in relation to income in the world. It produced a dangerously inflated property bubble. It encouraged a bloated, banking sector while manufacturing declined at an unprecedented rate. Then, they socialised the costs of the crash though a massive budget deficit, the biggest of any major economy. His disciple, Ed Balls, has – sort of – apologised but advocates policies that would repeat the disaster."

When this Government came in they said they would cut borrowing so what has happened since? well this months borrowing is at a record high since 1989, they are putting this country through hoops and it aint working. no growth, record lending is the opposite to what we were promised, yes its hurting but it will never stop at this rate because we are spiralling downwards into an abyss, you can see on the faces of the Lib Dems that they are worried but they have allowed this to happen. Clegg is now hinting at changing and putting stimulus into the economy, empty rhetoric I'm afraid.
When they came in I said this would happen, Cuts never work on there own, things will get worse and worse until we have to seek International help as we did when they tried the same thing in the eighties. Its crazy politics

12 Billion pounds? Stop yer complaining!!!

Our esteemed leaders issued a Blanket Guarantee on the Banks, and got the figures wrong by over €150 Billion.
Try being €200 Billion in debt, having the IMF dictate your fiscal policies thereby giving away any economic sovereignty you once had, and watch as every state asset you have including your forestry and gas reserves are sold off at firesale prices to the invisible elite.

I despair.

doesnt matter, they'll no doubt find some mug to pay it!!