Pressure on the public finances will be less severe than previously thought, according to the independent tax and spending watchdog, as the UK narrowly dodges another recession this year.
The Government will borrow £11 billion less over the next five years than forecast in November, the Office for Budget Responsibility (OBR) said, while economic growth estimates remain broadly unchanged.
The OBR expects the Government to borrow £126 billion this year, rather than £127 billion, while it maintained its 2012/13 forecast at £120 billion and lowered its each of its predictions for 2013/14 to 2016/17.
The lower borrowing bill came as the OBR lifted its estimate for gross domestic product (GDP) growth this year to 0.8 per cent, from 0.7 per cent in November, and cut its prediction in 2013 from 2.1 per cent to 2 per cent.
The forecasts for 2014 to 2016 were unchanged.
Howard Archer, chief UK and European economist at IHS Global Insight, said the lower borrowing and unchanged growth forecasts were a “rare luxury” for the Chancellor, but warned 0.8 per cent growth this year was “hardly a matter for celebration”.
The Chancellor added that he is on target to eliminate the structural deficit – the share of the budget deficit that would remain after the economy recovers – by 2016/17.
The Chancellor is under pressure to stick to his tough austerity measures after agencies Fitch and Moody’s both put the UK’s AAA credit rating on negative outlook.
Vicky Redwood, chief UK economist at Capital Economics, said that by delivering a fiscally neutral budget, Mr Osborne can leave his deficit-busting plans unchanged.
However, she said the forecasts still look “optimistic” and added: “The Government will soon start finding it rather harder to bring down borrowing.”
The OBR forecasts are similar to those made in November and are higher than City expectations and broadly in line with the predictions made by the Bank of England.
The watchdog offered a bleak view of the UK economy in its November report, when it slashed growth estimates and predicted a surge in public borrowing over the next five years.
The boost to the 2012 growth forecast comes after a slightly improved start to the year, which has seen upbeat surveys from the manufacturing and services sectors.
And the lower estimate for borrowing in the year to March 2012 comes despite a larger-than-expected £15.2 billion jump in February’s net borrowing excluding financial interventions, such as bank bailouts.
Many economists had predicted the Chancellor would undershoot the full-year target after the Government recorded its highest surplus for four years in January of £7.9 billion.
Mr Osborne also acknowledged the benefit the Government’s decision to take on the state-owned Royal Mail pension scheme will have on borrowing in 2012/2013.
The Government will take on £28 billion of pension fund assets through the move, which it will put towards cutting its debt, rather than using it for investment, the Chancellor said.
The Royal Mail transfer could bring the borrowing forecast down to around £92 billion in 2012/13 - the first time the figure has dropped below £100 billion since the financial crisis.