According to the Financial Times, the Office for Budget Responsibility (OBR) now expects the structural (i.e. cyclically-adjusted) current budget deficit to be eliminated in 2016-17 on announced policies – two years later than at the time of the Budget. This slippage, however, reflects a downward reassessment by the OBR of the UK economy’s supply-side capacity rather than worse-than-expected recent borrowing outturns.

Running the raw borrowing numbers through Datastream’s seasonal adjustment programme, the actual current deficit was an annualised £91 billion in the first seven months of 2011-12 – on track for the OBR’s previous full-year forecast of £90 billion. Overall public sector net borrowing was £124 billion versus a £122 billion full-year projection.

This year’s fiscal performance, in other words, has been surprisingly good against the background of weaker-than-expected economic growth.

The fiscal position, moreover, is better than implied by the targeted measures, which exclude income arising from the financial interventions of recent years – see previous post. In particular, the Bank of England is currently earning about £10 billion per annum on its QE operation (by paying Bank Rate on reserve money created to finance a higher-yielding gilt portfolio).

It is bizarre that the government is under pressure to implement additional fiscal tightening because OBR economists have changed their guess about supply capacity and despite respectable progress to date in reducing the deficit.