OSBORNE scissors

The Conservative Manifesto of 2010 declared that “we will provide an emergency Budget within 50 days of taking office to set out a credible plan for eliminating the bulk of the structural current budget deficit over a Parliament”.  This remained the Tory aim in government after the General Election of that year, though the Coalition Agreement pledged only to “significantly accelerate” the rate of deficit reduction.

The sum of the structural deficit, then as now, was endlessly debatable (£5 billion? £10 billion? £15 billion?), but it certainly wasn’t £90 billion or so – the sum at which it stood when the General Election of last May was contested.  This was a reduction of about half, if one measures the deficit as a proportion of GDP: in 2009-2010, it was ten per cent of it and in 2014-2015 five per cent.  But it was a fall of rather less in absolute terms: during the same period, it dropped from £154 billion to that £90 billion.

Either way, Conservatives in Government failed to hit their target.  Since deficit reduction is not reducible to a government implementing a tax and spending plan – other factors such as global economic trends can be even more decisive – to say so is not necessarily to pile up blame at the Coalition’s or at George Osborne’s door.  But the figures help to make the point that what government says it will do, when it comes to deficit reduction, and what actually happens are not the same at all.

Peter Hoskin put the same case on this site three years ago, writing that although Treasury plans are necessary – government must have a map to steer by – they are fallible.  It is as though the country which the map illustrated were itself changing all the time, with borders vanishing, motorways being closed off and population centres moving (which is why Peter applauded the “fan charts” produced by the Office of Budget Responsibility and others, since they better illustrate human fallibility).

As he wrote, “if you compare the actual amounts borrowed in the five years to 2007 with the original forecasts made in Gordon Brown’s Budgets…then you’ll see that New Labour exceeded their expectations by over £100 billion”.  Those who want to make further assessments of the gap between what successive governments forecast borrowing levels would be and what they turned out to be will find plenty of material in these Office of Budget Responsibility figures.

I set all this out because of the debate, now heating up nicely during the run-up to this month’s Autumn Statement, over whether the Chancellor should attempt to run a surplus – and if he does, how big it should be.  He is aiming for one of £10 billion in five years’ time.  His proposed tax credits saving is £3.5 billion.  So a simple way of getting out of his tax credits trap – with no compensating spending cut or tax rise – would be to drop his plan, take the hit and aim for a £6.5 billion surplus instead.

All fine on paper, perhaps – but less appealing in practice.  Everything we know from experience about the real economy cries out that the real world doesn’t work like this.  As we have seen, Osborne ended up with borrowing in 2014-2015 of about £90 billion, having originally aimed for borrowing then of perhaps £20 billion.  If the last Government missed its deficit target by the best part of £70 billion, how can we possibly expect this one to fine-tune a surplus by £3.5 billion over the same period?

The economy isn’t a mathematical model.  It is a part of what human beings do – and since what we do isn’t predictable, what it does isn’t so either.  Which explains why the Chancellor should aim for the biggest surplus that he thinks reasonably possible – that £20 billion figure.  He may be thinking more of putting Labour on the wrong side of a dividing line than of economic outcomes, but his aim is right notwithstanding, because it is always prudent to prepare for the worst.

Or, as he himself would put it, to fix the roof when the sun is shining.  He cannot rely on tax revenues coming in as expected.  He cannot depend on growth abroad holding up.  He cannot wave away the possibility, even the likelihood, of recession returning before 2020.  If it does, that deficit will balloon again – and as a proportion of GDP, too.  The sum of his opponents’ case is: don’t worry – it won’t happen.  If you’ve any sense, you won’t be so complacent.  Neither should he be.

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