'Stress test' warning issued by economic watchdog

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A stark warning to panicking MPs not to loosen the nation’s purse strings was issued by the country’s economic watchdog today.

In a strongly-worded caution to politicians desperate to abandon austerity, the Office for Budget Responsibility said they were courting a national disaster.

It said the public finances could not pass a “stress test” and that raising borrowing now could put them on an “unsustainable path”.

The intervention came after a chorus of calls to lift pay caps and crank open the welfare tap in the wake of the Conservative election disaster.

The OBR said Theresa May’s failure to win a Commons majority left the Government wide open to pressure to increase spending and buy off interest groups. 

Shadow chancellor John McDonnell mocked the Prime Minister, tweeting: “It looks like the OBR view Theresa May’s weak government as a fiscal risk… ouch”.

Describing the phenomenon as “austerity fatigue”, the OBR said: “Debate over ongoing, real terms cuts to public sector pay has also intensified. The advent of minority government could also loosen the Treasury’s grip on public spending control.” The OBR said that new unfunded giveaways by the  Government “would only add to the longer-term challenges”.

“In many recent fiscal events, giveaways today have been financed by the promise of takeaways tomorrow,” it said. “The risk there, of course, is that tomorrow never comes.”

Many Tories have publicly claimed that the pay cap on five million public sector workers, including the police, firefighters and teachers, cost them seats at the election. 

Mrs May was forced to offer £1 billion in handouts to the Democratic Unionist Party to shore up her shaky government, which is in danger of losing spending votes if just seven Conservatives rebel.

The OBR said it was vital to keep a lid on borrowing before any future shock to the economy. “The public finances need to be managed prudently during more favourable times to ensure that when these shocks do crystallise they do not put the public finances onto an unsustainable path. 

“This is all the more important given the rise in the stock of debt in recent years, and the greater sensitivity of future debt interest costs to changes in interest rates and retail price inflation.” Chancellor Philip Hammond said: “This is a sober analysis of the challenge we continue to face, and a stark reminder of why we must deliver on our commitment to deal with our country’s debts.”

The OBR also warned that Brexit could derail the economy. 

“The vote to leave the EU has introduced a new set of uncertainties and risks regarding the economic and fiscal outlook,” it said. 

The OBR said there was already  “evidence of weakening business investment both before and after the vote” and highlighted the possibility of  a “hit to productivity” on leaving.

In addition, any crackdown on immigration levels could hold back sectors of the economy, such as hospitality, which rely on migrant workers.

The OBR said it had devised a fiscal stress test similar to those applied by the Bank of England to banks and found that the UK’s finances failed by a wide margin.

Even a less severe recession than the crash nine years ago would mean “fiscal effects are severe”, it found, adding £158 billion to borrowing by 2022.

“The Government’s fiscal targets would be missed by wide margins,” it said. But even without a recession, it would be “challenging ” to meet deficit reduction targets.

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