Austerity – either through tax rises or public spending cuts – is set to continue

How bad are the public finances?

Still terrible. At the start of the 2014-15 financial year in April, George Osborne may be able to boast he has halved the deficit from 11 per cent of national income in 2009-10 - but the 5.55 per cent deficit forecast for the next year is still at the bottom of the international league.

The chancellor is clear that borrowing is still dangerously high. “Securing Britain’s economic future means there will have to be more hard decisions; more cuts,” he says. All main opposition parties agree.

With public finances still so weak, there was no room to offer households money back. Instead he had to appeal to a different Tory instinct - freedom - by offering savers the keys to their pension pots.

Borrowing is improving though, isn't it ?

Improving is a very imprecise term. Yes, the headline level of borrowing in 2014-15 is expected to be £95.5 billion compared with £107.8 billion in 2013-14. And both figures are a few billion lower than the last forecast in December. So in these two ways, borrowing is improving.

The Office for Budget Responsibility (OBR) tries to be a little more sophisticated. It calculates that although headline borrowing is down, once you adjust the numbers to reflect the unexpected upswing in the economic cycle, borrowing figures are actually worse than a year ago.

Year after year, these estimates of the underlying deficit have deteriorated as the Office for Budget Responsibility has become more pessimistic about Britain’s capacity for a prolonged period of recovery.

What do growth estimates suggest?

Nothing good. The OBR uses indicators showing the ups and downs of the economy – including capacity utilisation, wages and unemployment – to get an idea of whether the economy needs stimulus, is normal or overheating.

Capacity utilisation indicators are red hot; recruitment difficulty indicators roughly normal, wages still subdued. Put it all together and output appears to be roughly normal. Much more growth and Britain will enter an unsustainable boom.

Were the OBR to stick with its models, it would have told the chancellor he had another £20billion black hole in the public finances. But Robert Chote, OBR chairman, judged it was best to give Mr Osborne the benefit of the doubt.

The true cyclical position is something that can only be learnt over time, so there are good reasons not to scare the horses now. On the other hand, the big and repeated mistake in economics over the past 40 years has been to assume the good times will last.

Are there more reasons to worry?

Normally, tax revenues grow as fast or faster than the total rise in cash spending in the economy.

This year revenues are falling significantly short. The recovery has happened and revenues have been better than expected, but they have not flowed into the treasury as fast as we might have expected. Some of the revenue shortfall reflects rises in the income tax personal allowance, but the upward revisions to tax receipts have not kept pace with those of nominal gross domestic product.

What keeps the OBR awake at night?

It has concerns that the recovery is built on sand and will not last. It notes the upswing has been largely cyclical so far with productivity growth “exceptionally weak”, a labour market which has “tightened significantly” and household spending caused “predominantly by lower saving rather than from higher real household incomes”.

What does it mean for me?

That austerity – either through further public spending cuts or tax increases – will continue for the foreseeable future.

On current plans, public spending on day-to-day services is to be cut to its lowest share of national income since 1948 by 2018. On this measure, only a third of the cuts have been implemented so far.

Copyright The Financial Times Limited 2014