Nida Broughton is Chief Economist at the Social Market Foundation
The current Government, and its Chancellor, have staked their credibility on its ability to bring down government borrowing and debt. Yet, in these, both have largely failed. So it is surprising that George Osborne seems to be making the same mistake again.
In 2010, the Coalition set itself a self-imposed target to eliminate the structural deficit within a rolling five year period, and have government debt falling between 2014-15 and 2015-16. As early as 2012, it acknowledged that the debt target would not be met on time. The Government is only on track to meet its structural deficit target on the OBR’s estimates because the target had no fixed deadline – it was based on a rolling five year deadline that is pushed further into the future with every year.
Difficulty meeting the targets has largely been due to the state of the economy. In 2010, the OBR thought that the deficit would be cleared by the next General Election. But the recovery was slow to take off, and evidence mounted that poor productivity was going to keep growth subdued for some time. With fewer tax revenues materialising, borrowing has not fallen as expected.
Yet Osborne is not only planning to target the structural deficit again in the next parliament, but wants to enshrine in law an even harder-to-meet version of it – to eliminate it by 2017-18. This time, the deadline will be fixed. In the face of previous failures, some might call this admirable perseverance. Yet given the huge uncertainty involved in forecasting the state of the economy in the future, others might call it unwise.
The SMF’s recent Deficit of Growth paper shows that based on the latest economic forecasts, Osborne would already be on track to miss the proposed deadline to eliminate the structural deficit by 2017-18. But there are huge uncertainties. There is no consensus on the size of the structural deficit today, let alone in three years’ time. As the SMF’s own Autumn Statement briefing shows, if we assume that the economy can regain the productivity growth of the early 2000s, no spending cuts will be needed to eliminate the structural deficit at all. If the economy repeats the performance of the 2010 parliament, the cuts required to meet the structural deficit target would balloon.
Meanwhile, the details of how the Government plans to eliminate its estimate of the structural deficit remain unclear. The SMF’s analysis shows that growth will be the deciding factor between success and failure. But there is no big strategic plan proposed for boosting growth.
Having met with little success in meeting previous targets, the Government’s fiscal credibility now appears to be reliant on simply announcing more self-imposed targets for itself. Perhaps the real reason for the newfound focus on the structural deficit is that the Conservatives previous plan – to run an overall surplus by 2018-19 now looks doomed to fail, with SMF analysis showing a gap of £14 billion.
So we have a target that on the best estimates looks like it has been repeatedly failed so far, combined with no clear strategy to hit it. It hardly seems like a reputation for fiscal credibility worth shouting about.