The IFS Green Budget suggests that, even relative to major planned cuts, Whitehall departments will underspend by more than £3 billion this year.
The result of the underspend is that the Government will borrow slightly less in 2011-12 (£2.9 billion) than the latest official forecast. We are also more optimistic about future tax receipts than the OBR, meaning that if the economy broadly evolves as the OBR expects then borrowing could be £9 billion lower in 2016-17 than the official forecast. But significant downside risks to the public finances, combined with long-term pressures from an ageing population, suggest that the Chancellor has little scope for a significant permanent fiscal loosening relative to current plans.
The risks to our central forecast are very much on the downside. Should the Eurozone break up, or the economy do much worse than forecast for other reasons, then future borrowing would be increased and one - or both - of the Chancellor's fiscal targets would be broken.
The case for a significant short-term fiscal stimulus to boost the economy is stronger than it was a year ago. There seems little prospect that it would prompt an offsetting monetary tightening in the present climate. But a small loosening would be likely to deliver only a small boost to the economy, while a big one might risk undermining investor confidence.
We are delighted to have produced this year's Green Budget in collaboration with Oxford Economics. We are also very grateful to the Economic and Social Research Council for supporting this work and for funding much of the day-to-day research at IFS that underpins the analysis in this report.