Commentators often claim that interest rates must be kept low because fiscal tightening has yet to begin in earnest. This is misleading. Public sector net borrowing, adjusted for the economic cycle, is on course to fall by a whopping 1.8% of GDP between 2009-10 and 2010-11. If the economy is shown to be growing solidly in early 2011, the fiscal excuse for continued monetary laxity will look increasingly lame.

In its November update the Office for Budget Responsibility (OBR) projected that cyclically-adjusted net borrowing would fall from 8.8% of GDP in 2009-10 to 7.6% in 2010-11 and 5.3% in 2011-12. So fiscal restriction was forecast to amount to 1.2% of GDP this year, rising to 2.3% in 2011-12.

Recent headline numbers, however, have surprised favourably: the Institute for Fiscal Studies suggests that borrowing is on course to fall to £139 billion in 2010-11 versus the OBR's forecast of £148.5 billion and £156.4 billion in 2009-10. The £9.5 billion shortfall is equivalent to 0.6% of GDP and appears to reflect a structural improvement rather than stronger-than-expected economic growth (at least on current ONS GDP estimates).

Cyclically-adjusted net borrowing, therefore, may be about 7.0% of GDP in 2010-11 rather than the OBR's 7.6%, representing a 1.8 percentage point reduction from 2009-10. If so, the further decline needed to achieve the OBR's projection of 5.3% in 2011-12 would be 1.7 points. The government's borrowing goals, in other words, can be achieved without stepping up the pace of fiscal tightening between 2010-11 and 2011-12.