The Treasury is preparing to abandon its chief fiscal target for this parliament in the autumn statement on 5 December if its retention would mean imposing further swingeing spending cuts before the next election.
The fiscal mandate requires the government to ensure that public sector net debt as a proportion of national income is falling between 2014-15 and 2015-16. Abandoning the target would be a risky political decision.
Current high borrowing figures and lower tax receipts have rapidly reduced ministers' chances of reaching the target, though the Treasury insisted on Tuesday it was premature to come to a final conclusion before further sets of borrowing figures are published.
Well before the autumn statement, Osborne and the Office for Budget Responsibility (OBR) will hold discussions with the Treasury on the implications of its spending plans for meeting the debt GDP target. In March, the OBR predicted the government would narrowly meet its debt target, but since then borrowing figures have been substantially higher than forecast. City experts are predicting the Treasury will borrow £48bn more than forecast in 2015-16. The government's debt ratio would rise that year to 90% from 85.2% the previous year.
There have been reports that the chancellor, George Osborne, who announced the date for the autumn statement on Tuesday, has even been considering a small fiscal stimulus to boost demand, a view that is gaining growing support in business circles and among Tory policymakers.
Few believe a modest stimulus would lead to a surge in UK borrowing costs or a serious attack by credit rating agencies.
At the weekend, the business secretary, Vince Cable, hinted at the scale of government discussions, saying: "The problem of growth is that we have a very serious shortage of demand. It's nothing to do with those supply side measures basically. It's a demand issue."
Launching his industrial strategy on Tuesday, he said there was no conflict between supply and demand measures.
The Liberal Democrat deputy leader Simon Hughes went further at the weekend, saying: "Clearly plan A hasn't been enough, but plan A was the right place to start because, unless we restored the sense that we were in control of our own economy at home and retained international credibility in Britain, nothing else would be possible. Now what hasn't happened is that growth hasn't come nearly as quickly as people thought and hoped. The levers that have been pulled haven't adequately worked."
The issue is likely to be raised at the Liberal Democrat conference in a week's time.
The threat to the debt GDP target came into focus in August when it was reported that public sector net borrowing totalled £0.6bn in July, compared with a surplus of £2.8bn last year. This was way below the £2.5bn surplus expected by analysts.
In the Commons on Tuesday Osborne refused to accept the August borrowing figures inevitably signalled a new structural problem. He conceded that "borrowing in the short term has been higher this year than in the first four months of last year", but he pointed to "particular one-off factors, such as the shutdown of the Elgin oilfield. That is why the increase in borrowing comes from weaker corporation tax receipts." He added: "VAT, national insurance and income tax receipts have broadly held up, despite the weaker economic conditions here and around the world."
Treasury sources concede that ministers may have to adjust their plans if there has been a permanent fall in tax receipts. The Treasury said on Tuesday that the government was committed to its fiscal plan.
The government has an additional target of ensuring policy is consistent with achieving at least a cyclically adjusted current budget balance within five years, but this is a less politically challenging target as it only has to be met in five years' time from the point at which the latest OBR forecast is made.
Labour sources claimed the government's recent set of supply-side announcements would do little to address the short-term issues of lack of confidence.
Osborne appeared to cut off one route to make short-term spending cuts saying the government remained committed to its aid target, telling MPs: "This is the government who will deliver the 0.7% aid commitment that all parties signed up to."
There had been speculation that the arrival of Justine Greening as international development secretary presaged a weakening of the commitment.
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